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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For Fiscal Year Ended: December 31, 2003



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



FOR THE TRANSITION PERIOD FROM             TO
            .



Commission File No. 0-22958



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INTERPORE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 95-3043318                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification number)
|                                                               | 
|181 Technology Drive, Irvine, California                       |  | 92618-2402                             
|(Address of principal executive offices)                       |  | (Zip code)                             



Registrants
telephone number, including area code: (949) 453-3200



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Securities registered pursuant to Section 12(b) of the Act:



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|None                |  |                                          



Securities
registered pursuant to Section 12(g) of the Act:



Common
stock, no par value



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yesx    No ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.x



Indicate by the check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12-b-2).    Yesx    No ̈



Based on the closing price on the Nasdaq Stock Market on June 28, 2003 (the
last business day of registrants most recently completed second fiscal quarter) the aggregate market value of voting stock of Interpore International, Inc. held by non-affiliates was $188,079,000. For purposes of this calculation, we assume
directors, officers and holders of ten percent or more of our common stock outstanding are affiliates. The number of shares of common stock outstanding as of February 27, 2004 was 17,984,212.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of our Joint Proxy Statement for the 2004 Annual Meeting of
Stockholders of Interpore International, Inc. are incorporated by this reference into Part III as set forth herein.



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##### Table of Contents

PART I



Item 1. Business



Overview



We are a
medical device company that designs, develops, manufactures and markets a complementary portfolio of products for spine, orthobiologic and minimally invasive surgery applications. Our focus is primarily on the spinal surgery market. Our product
portfolio addresses what we believe are two of the fastest growing areas in the medical device industryspinal implants and orthobiologics.



Virtually all spine fusion procedures require the use of a bone graft and a majority of these procedures also use spinal implants. We offer three distinct
product lines which can be used in combination for spinal fusions: spinal implants, bone graft materials and products used to derive growth factors. Because spine surgeons are the primary customers for each of our product lines, we believe our
complementary product portfolio provides substantial cross selling opportunities to our distribution network. We plan to continue to develop and commercialize new products which will allow us to offer our customers a more comprehensive solution for
spine fusion procedures.



Our principal executive offices are
located at 181 Technology Drive, Irvine, California 92618, and our telephone at that location is (949) 453-3200. Our Internet address is www.interpore.com. Our report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and other Securities and Exchange Commission filings are available free of charge on our web-site as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC.



Recent Developments



On March 7, 2004, we entered into a definitive agreement with Biomet, Inc. under which Biomet will acquire all of our
outstanding common stock for cash in an amount equal to $14.50 per share, which represents a total equity value of approximately $280 million. Although the transaction is subject to regulatory approval, approval by our stockholders and other
customary closing conditions, we expect the transaction to close in the second quarter of 2004.



Spine Anatomy



The
spinal column consists of 24 separate bones called vertebrae that are connected together to permit a normal range of motion. The spinal cord, the bodys central nerve column, is enclosed within the spinal column. Vertebrae are paired into what
are called motion segments that move by means of three joints: two facet joints and one spinal disc. The typical spine, as it relates to spinal implants, is made up of the following four main regions beginning at the skull:



| |  | Cervical vertebrae are the first seven vertebrae in the neck;
| | - | -------------------------------------------------------------



| |  | Thoracic vertebrae are the next twelve vertebrae in the chest or rib cage;
| | - | --------------------------------------------------------------------------



| |  | Lumbar vertebrae are the next five vertebrae in the lower back; and
| | - | -------------------------------------------------------------------



| |  | The sacrum.
| | - | -----------



Together, the thoracic vertebrae and the lumbar vertebrae are frequently referred to as the thoraco-lumbar region of the spine.



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Spine Disorders



The following are the four major categories of spine disorders:



| |  | Degenerative conditions. Degenerative conditions in the facet joints and disc can result in instability and impingement on the nerve roots as they exit the spinal
canal, causing back pain or radiating pain in the arms or legs.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deformities. Deformities, such as scoliosis, are deviations in the normal curvature and alignment of the spine. Deformities range in severity from cosmetic issues
through varying levels of pain, discomfort or reduced function.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Trauma. Trauma, or injuries to the spine, if not corrected, can result in instability, pain, damage to the spinal cord and/or nerve roots, paralysis and deformity.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Tumors. Tumors in the spine typically occur in the vertebral body and eventually result in fracture of the vertebral body, causing instability, pain and deformity.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



Spinal Implant Market Overview



The prescribed treatment for spine disorders depends on the severity and
duration of the disorder and the success or failure of non-operative therapies. Non-operative therapies include bed rest, medication, lifestyle modification, exercise, physical therapy, chiropractic care and steroid injections. However,
non-operative treatment options are not effective in many cases, and we estimate that over one million patients undergo spinal surgery, such as spine fusions and spinal discectomies, each year in the United States. The number of spine fusion
procedures performed annually in the United States is estimated to exceed 400,000.



Advanced cases of spine disorders can require that surgeons remove all or part of a damaged disc and/or fuse two or more adjoining vertebrae together. A fusion involves the placement of bone graft material between two
vertebrae and may involve the use of spinal implants to immobilize the vertebrae while they fuse together. The bone graft is intended to provide a matrix that facilitates new bone ingrowth. Complete formation of new bone may take six to eighteen
months.



We estimate that product sales in the U.S. spinal
implant market are divided approximately as follows: 59% in the thoraco-lumbar spine generally using posterior instrumentation systems (i.e., hooks, rods and screws), 23% in the cervical spine using anterior plates or posterior instrumentation
systems, and 18% using intervertebral devices, often referred to as spine cages.



For years, spine fusion surgery has frequently been utilized in advanced cases of spine disorders. However, many spinal product companies, including us, and developing surgeons are designing artificial disc
prostheses, the first of which is expected to be FDA approved in 2005. The rationale of the artificial disc replacement is to implant a device that maintains the natural spinal motions rather than fusing vertebrae together. Many physicians believe
that avoidance of spinal fusion surgery in degenerative disc disease patients may prolong the health of adjacent vertebrae and discs, thereby avoiding the need to perform subsequent spinal fusion procedures. Future sales of artificial disc implants
may cause the market for implants used in spinal fusion procedures to decline. We do not anticipate that our artificial disc product will receive FDA approval prior to 2008.



Our Spinal Implant Products



In the spinal implant product category, our principal product offering includes the SYNERGY Spinal System, the C-TEK® Anterior Cervical Plate system, the GEO STRUCTURE vertebral body replacement device, the ALTIUS Occipito-Cervico-Thoracic System and the TPS Telescopic Plate Spacer. We believe our product offering is applicable to nearly all
spine stabilization procedures.



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SYNERGY Spinal System.Our SYNERGY Spinal System consists of rods, hooks and screws that
are attached to vertebrae adjacent to an injured or defective area of the spine. Our system is a universal implant system that allows surgeons to treat both the thoracic and lumbar portions of the spine. We believe our SYNERGY Spinal
System offers a number of benefits, including the following:



| |  | Ease of Use. Our SYNERGY Spinal System was engineered to be easy for surgeons to use, reducing surgical time and requiring less manipulation. The screws and hooks are
top tightening, the rods do not require pre-loading of additional components, and all implants allow for free rod rotation.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our patented variable locking screw design allows the surgeon to angle and tighten screws in many planes, reducing the amount of required rod bending and facilitating rod placement.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The patented design of the external hexagonal head of our double hex set screw shears off at a predetermined torque, allowing the surgeon to consistently tighten screws to the right
tension. However, an internal hexagonal cavity remains to allow the surgeon to remove the set screw, if necessary.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Universal Application. SYNERGY implants come in various sizes and types to meet the surgeons preferences and the patients anatomy, providing a secure
anatomic fit for virtually any pathology. The SYNERGY Spinal System does not require that the surgeon follow a single surgical protocol, but provides several options, and can be used in both anterior and posterior applications and is available in
adult and downsized versions.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Smaller and Stronger. We offer SYNERGY implants in either stainless steel or titanium. The strength of the SYNERGY implants provides resistance to fatigue and allows
the implants to be smaller than many competing products. Titanium implants are preferred in many foreign markets and are being used increasingly in the United States because titanium is compatible with magnetic resonance imaging (M.R.I.) of the
spinal area.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Low Profile. Profile describes the prominence of implants above the normal bony surfaces of the spine. The SYNERGY Spinal System was designed to minimize the height
and bulk of its implants, reducing the risk of irritation, inflammation and infection for the patient.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



C-TEK Anterior Cervical Plate System.Our C-TEK is a titanium plate that is attached using screws to two or more vertebrae in the cervical
spine in order to facilitate spine fusion. We received FDA 510(k) clearance of the C-TEK in late 2000, and introduced it to the market in the first quarter of 2001. We believe our C-TEK System offers a number of benefits, including the following:



| |  | Low Profile and Narrow Width. The C-TEK has a narrow width and one of the lowest profiles among the cervical plates available to the market. These characteristics are
particularly important in the cervical spine, where anterior implants must be placed close to soft tissues in the throat.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Fixed and Slotted Hole Versions. While most competitors cervical plate systems incorporate either a fixed hole or a slotted hole design, our C-TEK is available
in either design in order to accommodate the physicians surgical philosophy. These features allow the surgeon to create rigid, semi-rigid or load-sharing constructs.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | One-Step Locking. All cervical plate systems must incorporate some safeguard to prevent the backing out of screws, which can be a significant problem because the
implants are placed very close to soft tissues in the throat. While most other cervical plate systems require a locking procedure to be applied to each screw, our C-TEK incorporates a patented one-step locking mechanism that enables all screws to be
locked with a single procedural step.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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GEO STRUCTURE Vertebral Body Replacement. The GEO STRUCTURE is a uniquely designed titanium
spinal implant that can be manufactured in a variety of shapes and sizes. We received FDA 510(k) clearance for the oval-shaped version of this product in the third quarter of 2001 and for the rectangular-shaped version in the first quarter of 2002.
The rectangular version was introduced to the market in the fourth quarter of 2002, and the oval version was introduced in the third quarter of 2003. We recently filed a FDA 510(k) for a bent-rectangular-shaped version and expect to market this
version in the first half of 2004. We believe our GEO STRUCTURE offers a number of benefits, including the following:



| |  | High Strength. The GEO STRUCTUREs unique geodesic design with three-dimensional interconnected filaments provides very high strength with a minimum amount of
metal in the implant.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Minimal Metal.Compared with most other vertebral body replacement devices, the GEO STRUCTURE allows the surgeon to place a larger quantity of graft material at the
graft site, which may increase the probability of a successful fusion. It also allows a surgeon to more easily see the graft site radiographically after a procedure and to better assess fusion.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ALTIUSOccipito-Cervico-Thoracic System. Our
ALTIUS system is intended to promote fusion of the cervical spine and occipito-cervico-thoracic junction affected by degenerative conditions, deformity, trauma and tumors. We received FDA 510(k) clearance for this product in December 2002 and began
selling ALTIUS in the first half of 2003. We believe our ALTIUS system offers a number of benefits, including the following:



| |  | Variable-post screws allow for adjustment in any direction and simplify assembly of connectors and rod onto the screws.
| | - | -----------------------------------------------------------------------------------------------------------------------



| |  | Lateral adjusting screw connectors accommodate varying patient anatomy and optimize screw placement and allow increased lateral adjustment, reducing the need for precise contouring
of the rod.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



TPS Telescopic Plate
Spacer. Our TPS is an expandable titanium spacer intended to replace one or two vertebral bodies that must be removed due to tumor or trauma. This device combines the functions of an anterior plate and a vertebral column spacer and it
incorporates a patented telescoping feature. We received a Humanitarian Device Exemption (HDE) from the FDA in early 2000 for the cervical spine version of the TPS. In November 2001, we received FDA 510(k) clearance for the thoraco-lumbar version,
which was launched in the fourth quarter of 2002. We believe our TPS offers a number of benefits, including the following:



| |  | Telescoping design allows for in-line, in-situ distraction restoring vertebral body height and providing maximum contact on the end plates of the vertebrae.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Integrated design of an anterior lateral plate and spacer provide immediate stability and resistance to subsidence.
| | - | -------------------------------------------------------------------------------------------------------------------



Orthobiologics Market Overview



Orthobiologics is a term used to describe biomaterials used in orthopedic,
or bone-related, applications. Product categories classified as orthobiologics generally include:



| |  | bone graft substitutes;
| | - | -----------------------



| |  | implants machined from allograft, or cadaver tissue;
| | - | ----------------------------------------------------



| |  | growth factor technologies and platelet concentration systems;
| | - | --------------------------------------------------------------



| |  | bone cement;
| | - | ------------



| |  | resorbable tissue fixation products;
| | - | ------------------------------------



| |  | cartilage regeneration/repair products; and
| | - | -------------------------------------------



| |  | hyaluronic acid supplements.
| | - | ----------------------------



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Our current orthobiologic products fall into the bone graft substitutes and growth factor categories.



Bone Grafts. Bone is a composite material made
up of bone cells and a porous matrix. The matrix is composed of collagen and ceramic calcium phosphate crystals. Bone continuously remodels itself, thereby repairing the small imperfections formed due to everyday activity. Bone will often
spontaneously repair minor fractures without surgical intervention. However, major skeletal deficiencies from trauma, spinal instability, degenerative conditions and tumor will frequently require a surgical procedure involving bone graft.



It is estimated that bone grafts are used in over 600,000
procedures annually in the United States. They are used for a wide variety of indications including spine fusions, total joint surgery, maxillofacial applications and other surgical procedures. There are two major categories of bone grafts:
autograft bone and bone graft substitutes (which includes allograft and synthetic bone graft substitutes):



| |  | Autograft bone is bone harvested from another part of the patients skeleton, typically the iliac crest or hip. Once harvested, the bone is grafted to the site of the bone
deficit. Harvesting bone typically requires a second surgical procedure, increases total operating time and expense, and can lead to complications such as infection, chronic pain, deformity and excess blood loss. Autograft bone has both
osteoconductive (supporting bone growth) and osteoinductive (stimulating bone growth) properties.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Allograft bone is bone obtained from a cadaver. There are numerous bone banks that obtain cadaver tissue from regional donor centers. Once obtained, the tissue is processed and
configured into a variety of forms. Generally, bone graft substitutes derived from allograft are available as powder, chips, paste, gels and putties. Strict donor screening standards and testing for infectious agents such as hepatitis B and HIV have
significantly reduced the possibility of implant rejection and disease transmission. Allograft bone can have osteoconductive and osteoinductive properties.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Synthetic bone graft substitutes are artificially produced and can be used in place of autograft or allograft or mixed with autograft or allograft. Synthetic bone graft substitutes
are available in a wide range of forms, including granules, blocks, strips, gels, slurries and injectable bone graft cements. Synthetic bone graft substitutes generally have osteoconductive properties.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Growth Factors.Growth factors are specific,
naturally-occurring proteins that regulate bone generation by stimulating either the formation of new bone cells or the replication of existing cells. To derive growth factors, a number of methods are under development, including recombinant DNA
technology, gene therapy, extraction from cow bone and advanced filtration technologies. With recombinant DNA technology, the desired human growth protein gene is introduced into a production host, usually an animal, bacterial or yeast cell, and the
host makes the human protein along with its own. These proteins are then concentrated and made into a usable form. Using filtration methods, the human growth factor proteins are removed from the patients own blood. These proteins can be
concentrated and combined with either of the two major categories of bone graft.



Our Orthobiologic Products



Our principal
orthobiologic offering includes bone graft products and AGF® (Autologous Growth Factors®) related products. Our PRO OSTEON® products are implanted in a bone deficit and provide a matrix that facilitates new bone ingrowth. PRO OSTEON was the first synthetic bone graft substitute to obtain FDA approval for orthopedic applications. Our
BONEPLAST® is a resorbable bone void filler that is
replaced by the patients own bone during the healing process. Our INTERGRO® Osteoinductive DBM putty and paste combines allograft material with a non-toxic, lipid carrier. AGF products concentrate growth factors derived intraoperatively from platelets found in a patients own blood. These
growth factors are known to initiate the bone healing cascade.



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Bone Graft Substitutes.Our PRO OSTEON bone graft substitute products are derived from the
exoskeleton of two specific genera of coral and chemically converted into a material with porosity, architecture and chemical composition similar to that of human bone, using our proprietary manufacturing process. Due to its interconnected porous
structure, the graft provides a matrix that facilitates new bone ingrowth. Our INTERGRO DBM putty and paste are off-the-shelf, moldable tissue grafts. Our BONEPLAST bone void filler is a calcium sulfate (plaster-of-paris) material that resorbs and
is replaced with bone during the healing process. Our line of bone graft substitutes includes:



|                                                             |  |                                                                                      |  |                                                            |  |                        
|------------------------------------------------------------ |  | ------------------------------------------------------------------------------------ |  | ---------------------------------------------------------- |  | -----------------------
|Product                                                      |  | Description                                                                          |  | Indication                                                 |  | U.S. Regulatory Status 
|PRO OSTEON 500 (hydroxyapatite)                              |  | Bone graft substitute. 500 micron pore size blocks and granules.                     |  | Repair skeletal defects in extremities.                    |  | PMA approved in 1992.  
|                                                             |  |                                                                                      | 
|PRO OSTEON 500R (hydroxyapatite/calcium carbonate composite) |  | Patented resorbable bone graft substitute. 500 micron pore size blocks and granules. |  | Repair all skeletal defects, including spine.              |  | 510(k) cleared in 1998.
|                                                             |  |                                                                                      | 
|PRO OSTEON 200/ Interpore 200 (hydroxyapatite)               |  | Bone graft substitute. 200 micron pore size blocks and granules.                     |  | Repair skeletal defects in oral/maxillofacial areas.       |  | 510(k) cleared in 1985.
|                                                             |  |                                                                                      | 
|PRO OSTEON 200R (hydroxyapatite/calcium carbonate composite) |  | Patented resorbable bone graft substitute. 200 micron pore size blocks and granules. |  | Repair all skeletal defects, including spine.              |  | 510(k) cleared in 2000.
|                                                             |  |                                                                                      | 
|BONEPLAST (calcium sulfate)                                  |  | Fast resorbing, moldable bone void filler.                                           |  | Fill voids in bone. Used in extremities, spine and pelvis. |  | 510(k) cleared in 1999.
|                                                             |  |                                                                                      | 
|INTERGRO DBM                                                 |  | Osteoinductive demineralized bone matrix.                                            |  | Repair all skeletal defects, including spine.              |  | 510(k) pending.        



Our PRO OSTEON,
BONEPLAST and INTERGRO DBM products compare favorably with autograft, allograft and other synthetic bone grafts used today. We believe our products:



| |  | Eliminate morbidity and cost associated with autograft harvesting;
| | - | ------------------------------------------------------------------



| |  | Eliminate disease transmission and host rejection risk;
| | - | -------------------------------------------------------



| |  | Require no special handling or storage conditions; and
| | - | ------------------------------------------------------



| |  | Are osteoconductive and biocompatible.
| | - | --------------------------------------



In addition, our INTERGRO DBM putty and paste have the following beneficial properties:



| |  | Demonstrates osteoinductive properties;
| | - | ---------------------------------------



| |  | Putty-like consistency allows the product to be easily molded to fit virtually any shaped defect;
| | - | -------------------------------------------------------------------------------------------------



| |  | Formulated with a natural lipid carrier that is resistant to breakdown by bodily fluids or temperature; and
| | - | -----------------------------------------------------------------------------------------------------------



| |  | Contain no fillers such as glycerol, which has been shown to have toxic effects.
| | - | --------------------------------------------------------------------------------



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AGF (Autologous Growth Factors) and ACCESS®System.AGF products concentrate growth factors derived from platelets in a patients blood which have been known
to encourage more complete and rapid bone growth in bone defects. Our key AGF related product is the ACCESS system which utilizes the UltraConcentrator®Permeability Hemodialyzer disposable. Initially cleared for marketing by the FDA in the fourth quarter of 1998, these products are
used to produce a concentrated growth factor gel from platelets in the patients own blood. Our AGF related products were commercially launched in 1999. Our ACCESS system was cleared for marketing by the FDA in 2002 and commercially launched in
the first quarter of 2003.



The original process for collecting
AGF from the patients blood requires the use of a cell washer and involves numerous procedural steps. The ACCESS system eliminates the reliance on a cell washer, substantially simplifies the process by eliminating a significant number of
processing steps, and permits the option of producing smaller quantities of AGF. We designed the ACCESS system to compete with other similar products in the market that are simpler to use than our original AGF processing system and that permit the
physician to produce smaller quantities at a lower cost.



In
the AGF collection process, blood from the patient is separated into different component layers. One of the layers, known as the buffy coat, contains platelet-rich plasma and white blood cells. The buffy coat is processed using our
proprietary filtering technology which super-concentrates the platelets and fibrinogen, producing a cocktail of growth factors, including Platelet-Derived Growth Factor and Transforming Growth Factor Beta. With the addition of thrombin,
the fibrinogen contained in AGF is converted into fibrin, giving AGF a gel-like consistency. AGF can be combined directly with a bone graft material, such as our PRO OSTEON and BONEPLAST products, as well as autograft and allograft, and placed at
the bone graft site. The red cells and plasma component layers are returned to the patient, resulting in minimal blood loss.



We believe that AGF provides the surgeon with the growth factors desired for faster and more complete bone graft healing. Additionally, AGF offers the
following benefits:



| |  | Many surgeons prefer autologous solutions, such as AGF, that are derived from the patients own tissues;
| | - | --------------------------------------------------------------------------------------------------------



| |  | AGFs gel-like consistency improves handling properties and fixes the bone graft material to the bone defect site;
| | - | ------------------------------------------------------------------------------------------------------------------



| |  | AGF produces a cocktail of many cell-stimulating growth factors;
| | - | ------------------------------------------------------------------



| |  | Using the patients own growth factors eliminates dosage concerns; and
| | - | ----------------------------------------------------------------------



| |  | The cost of AGF is lower than that anticipated for recombinant products recently introduced or in development.
| | - | --------------------------------------------------------------------------------------------------------------



Minimally Invasive Surgery Market Overview



Minimally invasive surgery, or M.I.S., is the term used to describe surgical
procedures that can be performed through very small surgical openings, thereby limiting the amount of damage to tissues surrounding the surgical site. There is great interest in identifying procedures within orthopedics that are conducive to
minimally invasive surgery techniques. To date, arthroscopic procedures, particularly for the knee, have been the focus. However, it is believed that spine procedures offer a broad opportunity for improved technique via the use of M.I.S. procedures.
Within the spine market currently, minimally invasive procedures are increasingly being used to address spine fractures caused by osteoporosis, also known as vertebral compression fractures. Osteoporosis is a systemic skeletal disease characterized
by loss of bone mass and microarchitectural deterioration of the bone tissue, with a consequent increase in bone fragility and susceptibility to fracture. These fractures can result in an increased risk of death, significant pain, reduced
respiratory function and impaired quality of life.



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It is estimated that there are approximately 700,000 vertebral compression fractures in the United States
annually, and approximately two-thirds go undiagnosed or untreated. Of the patients who present with vertebral compression fractures, approximately 200,000 to 300,000 annually are diagnosed and are treated with marginal success using drugs, bed rest
and bracing. A small but increasing portion undergo surgical procedures known as vertebroplasty, kyphoplasty or osteoplasty, in which a reinforcing material is delivered into the fractured vertebra in order to eliminate micro-motion of bone
fragments for the relief of pain and to provide strengthening of the vertebra. Historically, these procedures have been performed primarily by interventional radiologists, but are increasingly being performed by orthopedic surgeons and
neurosurgeons.



Our Minimally Invasive Surgery Products



Our M.I.S. products consist of systems designed to facilitate the delivery
of materials into bone through small incisions, a procedure we refer to as osteoplasty. Initially, these products were used by surgeons in the treatment of vertebral compression fractures. In 2003, we introduced the Curved CDO System, which has an application in other orthopaedic
procedures.



| |  | CDO System.Our CDO System is designed to facilitate the delivery of materials into bone through a small incision. The CDO System provides key benefits for surgeons
and their patients, including enhanced diagnostic capabilities during the procedure, low-pressure delivery, improved control, significantly reduced procedural times and shorter recovery time.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | LP2System.Our LP2System provides easy access to smaller bony anatomy for material delivery. Its low profile design
enhances visualization for accurate placement and also facilitates the low-pressure delivery of viscous materials.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Curved CDO System. Our curved CDO System offers a minimally invasive approach to treating hard-to-reach acetabular cup complications in patients who have undergone
artificial hip replacement, and avoids the need to remove the acetabular cup or similar hardware.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Research and Development



As of February 1, 2004, our research and development department consisted of 30 full-time employees. We also engage outside consultants and academic
research facilities for assistance with our new product development and will license technology from third parties under appropriate circumstances. We plan to continue to use outside resources for product research. We have agreements with prominent
spine surgeons, who assisted in the development of certain of our spine systems, under which we pay royalties ranging from approximately 1% to 6% of net revenues generated from the sale of certain products. Our expenditures for research and
development were $6.7 million in 2001, $7.8 million in 2002 and $8.4 million in 2003.



Additional spinal implant and orthobiologic products which we currently have under development include:



| |  | Artificial Disc.Our simple patented design, with no moving parts, could allow a surgeon to replace a diseased disc while maintaining motion of the spine in the
affected segment, eliminating the need for fusion. We believe this product will be a Class III device, thereby requiring FDA premarket approval prior to marketing. The next major step in our development process is to obtain FDA approval of an
Investigational Device Exemption, or IDE, which would permit commencement of human clinical trials. We expect to file an IDE application with the FDA during the first half of 2004.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | BIOPLEX.We have development efforts underway for a polymer-reinforced PRO OSTEON material. We believe that increasing the strength of our resorbable version of PRO OSTEON in various configurations holds
promise for potential use as a natural, resorbable alternative to titanium and composite spinal implants currently available in the market. In the second quarter of 2003, we received FDA 510(k) clearance for BIOPLEX for use as a cement restrictor in
non-spine indications in the second quarter of 2003. We have applied for CE mark approval and we are currently pursuing approval for additional indications with the FDA.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | INTERGRO+DBM.  We are developing a version of INTERGRO with PRO OSTEON 500R granules added to produce a version with more structure to compete with similar
competitive product offerings. We expect to market this product in the first half of 2004.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Void Creator.We are developing a device to be used with our M.I.S. products that is designed to create a cavity in bony structures to facilitate insertion of
reinforcing substances. Some surgeons prefer to create a void in vertebrae during vertebroplasty procedures, and we believe this new device, once released, will be a valuable addition to our M.I.S. system. .
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Intellectual Property



As part of our ongoing research, development and manufacturing activities, we have a policy of seeking patent protection.
Patents relating to particular products, uses or procedures, however, do not preclude other manufacturers from employing alternative processes or from successfully marketing substitute products. We believe that although patents often are necessary
to protect our technology and products, the lengthy FDA approval process and certain manufacturing processes are often more significant barriers to entry. Moreover, much of the proprietary technology and manufacturing processes developed by us
reside in our key scientific and technical personnel and such technology and processes are not easily transferable to other scientific and technical personnel. The loss of the services of key scientific, technical and manufacturing personnel could
have a material adverse effect on our business and results of operations. In addition to our patents, we also own various trademarks protecting our corporate identity and product names.



Spinal Implant Products. We own seventeen U.S. patents related to various aspects of our spine products,
including the bone anchor, the rod/anchor interface, instrumentation, transverse connectors, bone stabilization plate and three-dimensional geometric structure. We have six U.S. patents pending concerning enhancements to our current spinal implant
systems and for several new products.



Orthobiologic
Products. We own fifteen U.S. patents related to our orthobiologic products. Of these, ten relate to our bone graft substitute products, and five are for our growth factor technology. We have three U.S. patents pending relating to several
new products.



Minimally Invasive Surgery
Products. We own one U.S. patent related to the CDO system and have three patents pending related to the M.I.S. system and the Void Creator, which is currently under development.



We require our employees, consultants and advisors to execute nondisclosure agreements in connection with their employment,
consulting or advisory relationships with us. We also require our employees, and some consultants and advisors, to agree to disclose and assign to us all inventions conceived during the work day, using our property or which relate to our business.
Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Finally, our competitors may independently develop
similar technologies.



The medical device industry is
characterized by the existence of a larger number of patents and frequent litigation based on allegations of patent infringement. As the number of entrants into our market increases, the possibility of an infringement claim against us grows. While
we attempt to ensure that our products do not infringe other parties patents and proprietary rights, our competitors may assert that our products and the methods they employ may be covered by patents held by them. We have in the past been, and
are currently, involved in litigation relating to our intellectual property. For additional discussion, please see Certain Business Considerations  We may face challenges to our patents and proprietary rights and Item 3 
Legal Proceedings.



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Customers, Sales and Marketing



We estimate there are approximately 14,000 practicing orthopedic surgeons in the United States in private practice,
hospitals and orthopedic treatment centers. Of the approximately 14,000 practicing orthopedic surgeons, we estimate there are over 2,000 fellowship-trained spine surgeons. Also, we estimate that there are over 1,000 neurosurgeons performing spine
fusion procedures that utilize implants.



Spinal implant
products are generally used by the spine surgeons and neurosurgeons that perform spine fusion procedures, and they usually make the decision as to which manufacturers products will be selected. The selection of an orthobiologic product is made
by these same spine surgeons and neurosurgeons as well as the remaining orthopedic surgeons performing procedures requiring a bone graft. M.I.S. products that deliver materials into bone are selected by orthopedic surgeons and neurosurgeons in
addition to interventional neuro-radiologists and pain-management specialists that perform vertebroplasty, kyphoplasty and osteoplasty procedures. We direct our marketing efforts to these surgeons.



Our sales organizations are headed by a Senior Vice President of Sales and
Distribution. Our domestic sales organization consists of independent agencies and direct sales representatives. As of February 1, 2004, we had contracts with 36 independent agencies which employed approximately 185 sales representatives, and we had
37 direct sales representatives. The domestic sales organization is managed by two Vice Presidents of Domestic Spinal and Biologic Product sales, and a Vice President of Domestic M.I.S. products sales. We invoice hospitals directly, generally at
list prices, and pay commissions to the agencies and direct sales representatives. We provide consignment inventories to our independent agencies, direct sales representatives and some hospitals. We select agency organizations and direct sales
representatives for their expertise in spinal implant, orthopedic or medical device sales, their reputation within the surgeon community and their sales coverage within a geographic area. Each agency organization and direct sales representative is
assigned a sales territory for some or all of our products and is subject to periodic performance reviews. In addition, each new independent sales agency and direct sales representative participates in training programs before initiating sales
efforts for our products. We also require each independent agency and direct sales representative to attend periodic sales and product training.



Outside of the United States, we distribute products only through independent distributors. We have a Vice President of International Sales and three
Division Managers and have established distribution arrangements with 37 distributors in 31 countries. Our international sales represented approximately 22% of product sales in 2001, 18% of product sales in 2002 and 20% of product sales in 2003.
Sales to our international customers are denominated in U.S. dollars.



In the United States, there are no significant customer concentrations, as we invoice hospitals directly for product used or shipped. However, in the international markets, we have three significant distributors that on a combined basis
accounted for approximately 51% of our 2003 international sales and 10% of our 2003 worldwide sales.



In order to improve shipping efficiencies and service to our international customers, we have an agreement with a contract warehouse in the Netherlands to
ship bone graft products to customers in certain countries outside of North America.



We participate in over two dozen professional meetings, the most significant of which include the North American Spine Society Meeting, the American Academy of Orthopaedic Surgeons Meeting and the Congress of
Neurological Surgeons. We also participate in scientific presentations and professional seminars at hospitals and provide funding for surgeon symposia from time to time.



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Third-Party Reimbursement



We expect that sales volumes and prices of our products will continue to be dependent in large part on the availability of
reimbursement from third-party payors. In the United States, our products are purchased by hospitals that are reimbursed by third-party payors for the devices provided to their patients. Such payors include governmental programs (e.g., Medicare and
Medicaid), private insurance plans and managed care programs. These third-party payors may deny coverage and reimbursement if they determine that a device used in a procedure was not medically necessary or was not used in accordance with
cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication. Also, third-party payors are increasingly challenging the prices charged for medical products and services. In international markets,
reimbursement and healthcare payment systems vary significantly by country and many countries have instituted price ceilings on specific product lines. We cannot assure you that our products will be considered medically necessary or cost-effective
by third-party payors, that reimbursement will be available or, if available, that the third-party payors reimbursement policies will not adversely affect our ability to sell our products profitably.



Particularly in the United States, third-party payors increasingly revisit
their payment methodologies and have developed methodologies that result in reimbursement below the prices actually charged by providers for procedures and medical products. In addition, an increasing percentage of insured individuals are receiving
their medical care through managed care programs, which monitor and often require pre-approval of the services that a member will receive. Many managed care programs are paying their providers on a capitated basis, which puts the providers at
financial risk for the services provided to their patients by paying them a predetermined payment per member per month. The percentage of individuals covered by managed care programs is expected to grow in the United States over the next decade.



We believe that the overall escalating cost of medical
products and services has led to, and will continue to lead to, increased pressures on the healthcare industry to reduce the costs of products and services. Some pressures are driven by legislative reform. For example, the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 has mandated changes that will revise payment methodologies to providers for certain medical devices. Although there has been some liberalization for recognition of costs of new technologies in
connection with inpatient hospital care, at this time we cannot predict the full impact of the legislation on our business, if any. In addition, we cannot assure you that third-party reimbursement and coverage will be available or adequate, or that
future legislation, regulation, or reimbursement policies of third-party payors will not adversely affect the demand for our products in development or our ability to sell these products on a profitable basis. The unavailability or inadequacy of
third-party payor coverage or reimbursement could have a material adverse effect on our business, operating results and financial condition.



Manufacturing



Spinal Implant Products. We contract with outside vendors for the manufacture of our spinal implant products, which are fabricated from
medical grade stainless steel or titanium according to our specifications. Following the receipt of products at our facility, we conduct inspection, packaging and labeling operations. The majority of our current spine products are distributed in a
non-sterile condition, which is the industry standard for implant systems such as our SYNERGY, C-TEK, TPS and ALTIUS products.



Our GEO STRUCTURE products are cast in titanium. We manufacture wax models of the products at our facility. The wax models are then delivered to contract
vendors that cast the implants using the lost wax method, and then conduct final finishing procedures. Following the receipt of GEO STRUCTURE products at our facility, we conduct inspection, packaging and labeling operations and have the packaged
implants sterilized by a contract vendor.



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Orthobiologic Products. Coral is the primary raw material used to manufacture our PRO
OSTEON products. The coral used in our products is sourced from two genera located in a variety of geographic locations. Our source for coral has been the tropical areas of the Pacific and Indian Oceans. We believe we have an adequate supply of
coral for the foreseeable future; however, we obtain our coral from a single source supplier and we have not identified a secondary source. Additionally, coral is covered under an international treaty entitled Convention on International Trade of
Endangered Species of Wild Fauna and Flora, which regulates for approximately 140 nations around the world the import/export of raw coral and products derived therefrom. To date, the limitations imposed by this treaty have not significantly
affected our ability to source raw coral. However, social and political conditions in countries controlling the export of coral have recently had a negative effect on our ability to source raw coral. We believe that our current supply of coral is
sufficient to satisfy our needs for the approximately next ten years at our current rate of production. However, we cannot assure you that our current supply will be sufficient for our ongoing operations or that we will be able to locate an
alternate supply source on reasonable terms or at all. Any delays in our ability to produce our orthobiologics products could have a material adverse effect on our operations. The manufacturing process for our PRO OSTEON line of bone graft
substitute products involves coral qualification and cutting, hydrothermal conversion, testing, packaging and sterilization of the product, all of which, with the exception of sterilization, are performed at our facilities.



Our INTERGRO DBM putty and paste is manufactured using a proprietary formula
which involves combining demineralized bone matrix (DBM), which is available from third party allograft tissue processors, with a biocompatible, non-soluble lipid carrier. While we have been able to obtain adequate quantities of the DBM to meet our
requirements to date, only limited quantities of cadaver tissue are generally available, and therefore we cannot assure you that sufficient quantities will be available to meet our future requirements.



Some of the products and materials supplied by our vendors are currently
sole-sourced, but we believe that we could locate alternate vendors for supply of these components. However, the specialized filter material contained in our UltraConcentrator was sole-sourced from a vendor that no longer supplies the material.
Although we have not identified any alternate vendors, we have a several year supply of the material in inventory and we believe there are suppliers that could supply alternate materials which may have equivalent function. In the event that a
re-engineering of the product were necessary due to conversion to an alternate material, delays in product availability could occur and significant costs could be incurred, either of which could have a material adverse effect on our operations.



Minimally Invasive Surgery Products.We contract
with outside vendors for the manufacture of components of our M.I.S. products. Following the receipt of products at our facility, we conduct inspection, packaging and labeling operations. For products distributed in a sterile package, sterilization
is performed by contract vendors.



Competition



Spinal Implant Market.Many companies compete in the
spinal implant market and the competition is intense. We believe that our largest competitors in the United States offering spinal implants are Medtronic Sofamor Danek USA, DePuy Spine, Inc., a Johnson & Johnson company, and Synthes-Stratec,
Inc., each of which has substantially greater sales and financial resources than we do. Medtronic Sofamor Danek, in particular, has a broader spinal implant line. Other companies have developed and are marketing products based on technologies that
are different from ours, including spinal implants designed to be used with minimally invasive or laparoscopic surgery, and allograft bone dowels.



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Bone Graft Substitute Market. Our bone graft substitute products compete principally with
autograft, considered the physicians gold standard, with allograft bone obtained from cadavers and with other synthetic bone products. Competitive bone substitute products include: DBX® demineralized bone matrix from the Musculoskeletal Transplant Foundation, Grafton® demineralized bone matrix products from Osteotech,
demineralized bone matrix products from ISOTIS OrthoBiologics, demineralized bone matrix products from Regeneration Technologies, AlloMatrix demineralized bone matrix from Wright Medical Technology, Vitoss from Orthovita, as well as other bone substitute products. Several other companies are pursuing additional synthetic
bone graft materials for orthopedic applications which could ultimately compete with our synthetic bone graft products in the United States.



Growth Factors. Several companies are marketing platelet concentrator systems that are competitive with our AGF related products. Although
we believe the ultimate output of these systems is inferior to AGF, their ease of use has allowed them to negatively impact sales of our AGF related products, leading to our decision to develop and launch our ACCESS system.



Medronic Sofamor Danek has introduced InFUSE, their recombinant human bone morphogenetic protein (rhBMP-2), which has
rapidly penetrated the market for growth factors, despite its high cost per application. Stryker Corporation has rights to a recombinant human bone morphogenetic protein called OP-1 for which the FDA granted Humanitarian Device Exemption status as
an alternative to autograft for long-bone non-union fractrues. Orthologic, Inc. is developing a synthetic protein called Chrysalin. Each of these products competes or will compete directly with our AFG related products.



Minimally Invasive Surgery Products.Several products compete with our M.I.S products including competitive
offerings by Kyphon, Inc. and Parallax Medical, Incorporated as well as the traditional large gauge needle surgical technique.



We compete in all of our markets primarily on the basis of product performance, price and ease of use, as well as customer loyalty and service. Many of
our competitors have greater resources for product development, sales and marketing and patent litigation than we do. Accordingly, they could substantially increase the resources they devote to the development and marketing of products that are
competitive with ours. Many of our potential customers have existing relationships with our competitors that could make it difficult for us to continue to penetrate the markets for our products. Additionally, several of our competitors have broader
product lines than we do. Moreover, our competitors may develop and successfully commercialize medical devices that directly or indirectly accomplish what our products are designed to accomplish in a superior and less expensive manner. If our
competitors products prove to be more successful than ours, our products could be rendered obsolete. If we fail to compete successfully against our existing or potential competitors, our operating results may be adversely affected.



Government Regulation



Overview



Our products and operations are subject to extensive and rigorous regulation by the FDA under the Federal Food, Drug, and
Cosmetic Act, or FFDCA, and its implementing regulations, guidances, and standards. The FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, promotion, distribution, and production of medical devices in the
United States to ensure that medical products distributed domestically are safe and effective for their intended uses. The FDA also regulates the export of medical devices manufactured in the United States to international markets. Any violations of
these laws and regulations could result in a material adverse effect on our business, financial condition and results of operations. In addition, if there is a change in law, regulation or judicial interpretation, we may have to change our business
practices, which could have a material adverse effect on our business, financial condition and results of operations.



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Under the FFDCA, medical devices are classified into one of three classes  Class I, Class II or
Class III  depending on the degree of risk associated with each medical device and the extent of control needed to ensure safety and effectiveness. Our current products include medical devices in all three classes.



Class I devices are those for which safety and effectiveness can be assured
by adherence to FDAs general regulatory controls for medical devices, which include compliance with the applicable portions of the FDAs Quality System Regulation, or QSR, facility registration and product listing, reporting of adverse
medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below.



Class II devices are subject to FDAs general controls,
and any other special controls as deemed necessary by FDA to ensure the safety and effectiveness of the device. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification procedure.
Pursuant to the recently enacted Medical Device User Fee and Modernization Act of 2002, as of October, 2002, unless a specific exemption applies, 510(k) premarket notification submissions are subject to user fees. Certain Class II devices are exempt
from this premarket review process. When a 510(k) is required, the manufacturer must submit to the FDA a premarket notification submission demonstrating that the device is substantially equivalent to a device that was legally marketed prior to May
28, 1976 or to a device that has already been approved through the 510(k) process.



If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device. By regulation, the FDA is required to clear a 510(k) within 90-days of submission of the
application. As a practical matter, clearance often takes longer. The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. After a device receives 510(k) clearance, any modification
that could significantly affect its safety and effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or premarket approval. We have made modifications to some of our devices which we believe do
not require the submission of new 510(k) notifications. If the FDA requires us to submit a new 510(k) notification for any device modification, we may be prohibited from marketing the modified device until the 510(k) is cleared by the FDA.



A Class III product is a product which has a new intended use
or uses advanced technology that is not substantially equivalent to that of a legally marketed device. The safety and effectiveness of Class III devices cannot be assured solely by the FDAa general controls and the other requirements described
above. These devices almost always require formal clinical studies to demonstrate safety and effectiveness.



Submission and FDA approval of a premarket approval application, or PMA, is required before marketing of a Class III product can proceed. As with 510(k)
submissions, unless subject to an exemption, PMA submissions are subject to user fees. The PMA process is much more demanding than the 510(k) premarket notification process. A PMA application, which is intended to demonstrate that the device is safe
and effective, must be supported by extensive data, including data from preclinical studies and human clinical trials. The PMA must also contain a full description of the device and its components, a full description of the methods, facilities, and
controls used for manufacturing, and proposed labeling. Following receipt of a PMA application, once the FDA determines that the application is sufficiently complete to permit a substantive review, the FDA will accept the application for review. The
FDA, by statute and by regulation, has 180 days to review an accepted PMA application, although the review of an application more often occurs over a significantly longer period of time, and can take up to several years. In approving a PMA
application or clearing a 510(k) application, the FDA may also require some form of post-market surveillance when necessary to protect the public health or to provide additional safety and effectiveness data for the device. In such cases, the
manufacturer might be required to follow certain patient groups for a number of years and make periodic reports to the FDA on the clinical status of those patients.



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Human clinical studies are generally required in connection with a Class III device, and may be required
for Class I and Class II devices. If the device presents a significant risk, as defined by the FDA, to human health, the device sponsor is required to file an investigational device exemption, or IDE, application with the FDA and obtain IDE approval
prior to commencing the human clinical trial. If the device is considered a non-significant risk, IDE submission to FDA is not required. Instead, only approval from the Institutional Review Board overseeing the clinical trial is
required. The FDA, and the Institutional Review Board at each institution at which a clinical trial is being performed, may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an
unacceptable health risk.



Spinal Implant Products



Our SYNERGY Spinal System received 510(k) marketing clearance from the FDA.
We received 510(k) clearance from the FDA to market the anterior portion of the SYNERGY Spinal System in October 1994 and for the posterior portion of the system in July 1995. In September 1996, we developed a titanium version of the SYNERGY Spinal
System for international distribution. We received FDA marketing clearance for the anterior portion of the titanium version in October 1995 and the posterior portion in January 1997.



In March 2000, the FDA approved a Humanitarian Device Exemption (HDE) for the cervical version of our corpectomy cage, the
TPS Telescopic Plate Spacer. An HDE is designed to encourage the discovery and use of devices intended to benefit patients in the treatment or diagnosis of diseases or conditions that affect or are manifested in fewer than 4,000 individuals in the
United States per year. In the case of the TPS, the approved indication is for the replacement of normal body structures following a vertebrectomy or corpectomy of the spine for metastatic disease in the cervical or cervical-thoracic spine. We
received FDA 510(k) clearance to market the Telescopic Plate Spacer Thoracolumbar (TPS-TL) in November 2001.



In October 2000, we received FDA 510(k) clearance to market our C-TEK Anterior Cervical Plate System.



In August 2001, we received FDA 510(k) clearance to market our oval
configuration GEO STRUCTURE spinal implant. An FDA 510(k) clearance for the rectangular configuration was received in February 2002.



In December 2002, we received FDA 510(k) clearance to market our ALTIUS Occipito-Cervico-Thoracic System.



Orthobiologic Products



In October 1992, we received FDA PMA approval to market PRO OSTEON 500 for
certain defects in the wide part of long bones. We subsequently received FDA PMA approval to market it in granular forms and a wide variety of block configurations up to 30 ccs in total volume, and for additional indications including the
treatment of cysts and tumors in long bones. Our PRO OSTEON 200 and Interpore 200 were cleared for marketing for certain kinds of oral surgery, periodontal defects, and craniofacial and orthognathic indications through 510(k) premarket
notifications.



In July 1997, the FDA cleared the use of a
competitive synthetic bone graft substitute product with a 510(k). Prior to clearance of this device, companies were required to obtain marketing approval from the FDA for bone graft substitutes via the Premarket Approval process. Other bone graft
substitute products have since been obtained through the less burdensome 510(k) premarket notification process, which has increased competition. In September 1998, we received 510(k) clearance from the FDA for our PRO OSTEON 500R resorbable bone
graft substitute product. The approved indications include use in bony voids or gaps of the skeletal system, such as the extremities, spine and pelvis. In December 2000, we received 510(k) clearance from the FDA for our PRO OSTEON 200R resorbable
bone graft substitute product.



In September 1999, we received
FDA 510(k) clearance for our BONEPLAST bone void filler for use in the extremities, spine and pelvis.



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In December 1998, we received FDA 510(k) clearances for the two key products in the AGF system, the
UltraConcentrator Permeability Hemodialyzer and the Automated Processor. In August 2002, we received 510(k) clearance for our ACCESS system.



In May 2003, we received FDA 510(k) clearance for our BIOPLEX as a cement restrictor.



Minimally Invasive Surgery Products



Our M.I.S. products fall within the Class I category of medical devices as determined by the FDA. No premarket approval was required for our M.I.S.
products.



We cannot assure you that we will be able to secure
510(k) approvals or PMA approvals for any new products that we may develop in the future. We also cannot assure you that the FDA will not suspend, modify, or revoke existing clearances and approvals for products currently being marketed by us. Any
delay in our ability to obtain necessary approvals or clearances or any suspension or revocation of existing approvals or clearances, could have a material adverse effect on our business, financial condition, and results of operations.



Continuing FDA Regulation



After the FDA permits a device to enter commercial distribution, numerous
regulatory requirements apply. These include:



| |  | the Quality System Regulation, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the
manufacturing process;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | labeling regulations;
| | - | ---------------------



| |  | the FDAs general prohibition against promoting products for unapproved or off-label uses; and
| | - | ------------------------------------------------------------------------------------------------



| |  | the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or
malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to reoccur.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The FDA has broad post-market and regulatory and enforcement powers. Failure to comply with the applicable U.S. medical device regulatory requirements
could result in, among other things, warning letters, fines, injunctions, consent decrees, civil penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial suspension of production, the FDAs refusal to grant
future premarket clearances or approvals, withdrawals or suspensions of current product applications, and criminal prosecution. If any of these events were to occur, it could significantly slow or stop our sales for an indefinite period of time,
which could cause our sales to decline.



Other Regulatory Agencies



We are registered as a medical device manufacturer
with the FDA, with state agencies such as the Food and Drug Branch of the California Department of Health Services and with the European Community. These agencies inspect our facilities from time to time to determine whether we are in compliance
with various regulations relating to medical device manufacturing, including the FDAs Quality System Regulations and ISO 9001/EN46001/ISO 13485, which govern design, manufacturing, testing, quality control, sterilization and labeling of
medical devices. We believe we are in compliance with the regulations established by these agencies applicable to our business. The European Community Notified Body, the FDA and the California Department of Health Services have inspected our
manufacturing facilities and quality assurance procedures in the past and we expect them to continue to do so in the future.



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With respect to our bone graft substitute products, we must also comply with the requirements of the
Convention on International Trade of Endangered Species of Wild Fauna and Flora, or CITES. This is an international agreement signed by approximately 140 nations, which agreement regulates the import and export of products which are derived from
endangered wildlife. Although the coral we use is not an endangered species, all harvested coral is subject to regulation under CITES. As a result, we must register and obtain licensure from the U.S. Department of Fish and Wildlife for both the
import of raw coral and the export of finished product. We maintain a multi-year supply of coral to minimize the risk of supply interruptions. Because each shipment of product exported outside of the United States or its possessions requires
individual permitting, and also to improve shipping efficiencies and service to our international customers, we entered into an agreement with a contract warehouse in the Netherlands for the purpose of international distribution of our products.



We must also comply with registration requirements of foreign
governments and with import and export regulations when distributing our products to foreign nations. Each foreign countrys regulatory requirements for product approval and distribution are unique and may require the expenditure of substantial
time, resources and effort to obtain and maintain approvals for marketing. In September 1995, we received approval to use the CE mark for our entire line of orthopedic and oral/maxillofacial synthetic bone graft materials. We received
approval to use the CE mark for our spinal implant systems in 1998, and applied the CE mark to our minimally invasive surgery products in 2001. The CE mark indicates that the products are approved for sale within 18 countries
in the European Community and European Free Trade Association and that we are in compliance with the ISO 9001 and EN 46001 standards which govern medical device manufacturers that are marketing products in Europe. The CE mark is now also accepted by
several countries outside of the European Community. We received our ISO 13485 certification in 2001 and our Canadian Medical Device Conformity Assessment System certification in 2002 which allows us to continue exportation to Canada. The ISO 13485
standard is designed for medical devices and will eventually replace ISO 9001 and EN 46001 standards for Europe.



Federal and State Privacy and Security Laws



Our business operations may be affected by Federal and state laws designed to protect the confidentiality and security of certain personal health
information. For example, the U.S. Department of Health and Human Services (HHS) has published the Standards for Privacy of Individually Identifiable Health Information, or the Privacy Rule, pursuant to the Health Insurance Portability and
Accountability Act of 1996, or HIPAA. The Privacy Rule imposes standards governing the use and disclosure of personal health information by covered entities, which include health plans, health care clearinghouses and certain health care providers,
and subjects those covered entities to civil and criminal penalties for failure to comply. The Privacy Rule not only requires covered entities to comply with these standards, but also requires them to obtain satisfactory assurances from any business
associate of theirs who receives personal health information that the business associate will safeguard that personal health information. Furthermore, HHS issued additional HIPAA regulations governing the security of electronic personal health
information, which are likely to add to the contractual obligations imposed on business associates in the future. While we are not currently a covered entity, the patient data that we access, collect and analyze in the course of our business may
include personal health information obtained from covered entities. If so, we may be asked to enter into written agreements that obligate us to comply with certain HIPAA obligations and impose liability on us for failure to comply. In addition, we
may be subject to state laws regulating the privacy and security of health information. Our efforts to comply with these Federal and state laws and related contractual obligations may be costly, and we may incur liability if we fail to comply with
them.



Anti-kickback Laws



Our operations and relationships with hospitals, physicians or other health
care providers are subject to federal and state anti-kickback laws. Certain provisions of the Social Security Act, which are commonly known collectively as the Medicare Fraud and Abuse Statute, prohibit persons from knowingly and willfully
soliciting, receiving, offering or providing remuneration directly or indirectly to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal
healthcare program such as Medicare and Medicaid. The definition of remuneration has been broadly interpreted to include anything of value, including such items as gifts, discounts, waiver of payments, and providing anything at less than
its fair market value. HHS has issued regulations, commonly known as safe harbors, that set forth certain provisions which, if fully met, will assure healthcare providers and other parties that they will not be prosecuted under the Medicare Fraud
and Abuse Statute. Although full compliance with these provisions ensures against prosecution under the Medicare Fraud and Abuse Statute, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that
the transaction or arrangement is illegal or that prosecution under the Medicare Fraud and Abuse Statute will be pursued. The penalties for violating the Medicare Fraud and Abuse Statute include imprisonment for up to five years, fines of up to
$25,000 per violation and possible exclusion from federal healthcare programs such as Medicaid and Medicaid. Many states have adopted prohibitions similar to the Medicare Fraud and Abuse Statute, some of which apply to the referral of patients for
healthcare services reimbursed by any source, not only by the Medicare and Medicaid programs.



Employees



As of
February 1, 2004, we had 213 full-time employees, of whom 90 were engaged in marketing and sales, 47 in manufacturing, 27 in regulatory affairs and quality assurance, 19 in general administration and finance and 30 in research and development. None
of these employees is represented by a union, and we have never experienced a work stoppage. We consider our relations with our employees to be good.



Certain Business Considerations



Investors are cautioned that certain statements contained in or incorporated by reference into this Annual Report on Form 10-K, or which are otherwise
made by us or on our behalf are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future
events or conditions, which include words such as believes, plans, anticipates, estimates, expects or similar expressions. In addition, any statements concerning future financial
performance, ongoing business strategies or prospects, and possible future actions, which may be provided by our management, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about
future events and are subject to risks, uncertainties, and assumptions about our company, economic and market factors and the industry in which we do business, among other things. These statements are not guaranties of future performance and we
undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.



Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. Factors
that could cause our actual performance and future events and actions to differ materially from such forward-looking statements, include, but are not limited to those discussed below and elsewhere in this Annual Report on Form 10-K.



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We may not be successful in completing our proposed acquisition by Biomet.



On March 7, 2004, we entered into a definitive agreement with Biomet, Inc.
under which Biomet will acquire all of our outstanding common stock for cash in an amount equal to $14.50 per share. Although we executed a definitive merger agreement with Biomet, the closing of the transaction is subject to various conditions,
including approval by our stockholders and regulatory approval, and we cannot assure you that the transaction will close in a timely manner or at all. If the proposed acquisition is not completed or is delayed, our business may suffer for a number
of reasons including, but not limited to:



| |  | loss of opportunities foregone while the transaction was pending;
| | - | -----------------------------------------------------------------



| |  | diversion of managements attention from our day-to-day operations while the transaction was pending;
| | - | -----------------------------------------------------------------------------------------------------



| |  | additional costs incurred in support of the proposed acquisition;
| | - | -----------------------------------------------------------------



| |  | potential disruption to our customers and suppliers as a result of the efforts and uncertainties relating to the transaction; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| |  | loss of employees due to uncertainty surrounding the acquisition.
| | - | -----------------------------------------------------------------



We are dependent on a few products which may be rendered obsolete.



A majority of our revenue currently comes from sales of our SYNERGY, C-TEK and PRO OSTEON products. We cannot assure you that we will continue to market
these products successfully or that we will be able to increase sales of these products in the future. Any significant diminished sales of our SYNERGY, C-TEK or PRO OSTEON products would adversely affect our business and results of operations.



If we fail to compete successfully against existing or potential
competitors, our operating results may be adversely affected.



The market for our products is intensely competitive, subject to change and significantly affected by new product introductions and other market activities of industry participants. Our principal global competitors with respect to our
spinal implant product line are Medtronic Sofamor Danek, Inc., DePuy Spine, Inc., a Johnson & Johnson company, and Synthes-Stratec, Inc. Our principal global competitors with respect to our orthobiologic products include DePuy Spine, Inc.,
Medtronic Sofamor Danek, Inc., Osteotech, Inc., Orthovita, IsoTis OrthoBiologics, Regeneration Technologies and Wright Medical Technology. Our principal competitor with respect to our minimally invasive surgery products is Kyphon Inc. We compete in
all of our markets primarily on the basis of product performance, price and ease of use, as well as customer loyalty and service. Many of our competitors have greater resources for product development, sales and marketing and patent litigation than
we do. Accordingly, they could substantially increase the resources they devote to the development and marketing of products that are competitive with ours. Many of our potential customers have existing relationships with our competitors that could
make it difficult for us to continue to penetrate the markets for our products. Additionally, several of our competitors have broader product lines that we do. Moreover, our competitors may develop and successfully commercialize medical devices that
directly or indirectly accomplish what our products are designed to accomplish in a superior and less expensive manner. If our competitors products prove to be more successful than ours, our products could be rendered obsolete. If we fail to
compete successfully against our existing or potential competitors, our operating results may be adversely affected.



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We may not be able to develop new products that will be accepted by the market.



Our future growth will be dependent on our ability to develop and introduce
new products, including enhancements to our existing products. We cannot assure you that we will be able to successfully develop or market new products or that any of our future products will be accepted by our customers. If we do not develop new
products in time to meet market demand or if there is insufficient demand for these products, our revenues and profitability may be adversely affected. The success of any new product offerings or enhancements to existing product offerings will
depend on several factors, including our ability to:



| |  | properly identify and anticipate customer needs;
| | - | ------------------------------------------------



| |  | commercialize new products or enhancements in a timely manner;
| | - | --------------------------------------------------------------



| |  | develop an effective marketing and distribution network for new products or product enhancements;
| | - | -------------------------------------------------------------------------------------------------



| |  | manufacture and deliver products in sufficient volumes on time;
| | - | ---------------------------------------------------------------



| |  | differentiate our offerings from competitors offerings;
| | - | --------------------------------------------------------



| |  | achieve positive clinical outcomes for new products or product enhancements;
| | - | ----------------------------------------------------------------------------



| |  | satisfy the increased demands of healthcare payors, providers and patients for lower-cost procedures;
| | - | -----------------------------------------------------------------------------------------------------



| |  | innovate and develop new materials, product designs and surgical techniques;
| | - | ----------------------------------------------------------------------------



| |  | obtain the necessary regulatory approvals for new products or product enhancements; and
| | - | ---------------------------------------------------------------------------------------



| |  | provide adequate medical and/or consumer education relating to new products and product enhancements and attract key surgeons to advocate these new products and product
enhancements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, we have spent and
expect to continue to spend significant cash on the development, product launch and continued marketing of new products, and if there is insufficient demand for these new products, our cash flow could suffer and our liquidity would be adversely
affected.



The market for spinal fusion implants may be negatively affected
by the introduction of artificial disc prostheses.



Numerous spinal product companies and developing surgeons are designing artificial disc prostheses for use primarily in treating patients with degenerative disc disease. These patients currently are often treated using spine fusion
procedures instrumented with spinal implant systems such as the ones we produce and sell. By using an artificial disc to treat degenerative disc disease, physicians will be able to maintain the natural motion of the spine, a benefit that is not
available in a spinal fusion procedure. The first artificial disc implant is expected to be approved by the FDA and launched in 2005, and will likely be followed by others. Many analysts and market research firms believe that utilization of
artificial disc implants in patients with degenerative disc disease will cause the market for implants used in spine fusion procedures to decline.



We have developed an artificial disc and are in the early stages of pursuing FDA approval to market this product. We expect our artificial disc design to
be approved by the FDA and launched in the United States no earlier than 2008, if at all. If we are unable to launch the device, if our launch is delayed or unsuccessful or if our device, once launched, fails to compete effectively against other
similar products, our sales, profitability and financial condition could be materially adversely affected.



Our ability to increase the market penetration of AGF, via the introduction of our new ACCESS processing system, is uncertain.



Our AGF related products were commercially launched in 1999 and were the first products available that could concentrate a
patients platelet-derived growth factors to levels shown in studies that would enhance bone growth in grafts. Since that time, several competitors have introduced competitive products that, while unable to achieve comparable growth factor
concentrations, are simpler to use than our original AGF processing system and can produce smaller quantities at a lower cost. Also, one competitor has introduced an FDA approved recombinant human bone morphogenetic protein. As a result, sales of
our AGF related products have declined.



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We have designed our new ACCESS system to address these competitive issues. We are also in late stages of
building a direct sales force for our orthobiologic products, and we expect this direct sales force will be a critical component in our domestic introduction of ACCESS. However, many of our competitors have greater financial resources and
distribution than us, and we cannot assure you that our efforts to increase sales of AGF related products via the ACCESS launch will be successful.



Additionally, published data regarding the efficacy of AGF are limited and in some cases present unfavorable outcomes. If long-term studies or clinical
experience indicate that procedures involving AGF do not provide patients with improved clinical outcomes, anticipated sales of our AGF related products and ACCESS technology may never materialize. Our success in selling our AGF related products
will depend, in large part, on the medical communitys acceptance of AGF. The medical communitys acceptance of AGF will depend upon our ability to demonstrate the efficacy of AGF and its advantages, favorable clinical performance and
cost-effectiveness. We cannot predict whether the medical community will accept AGF or ACCESS or, if accepted, the extent of the medical communitys use of these products. If long-term studies or clinical experience indicate that AGF causes
negative effects, we could be subject to significant liability.



Our M.I.S.
products business may not achieve the growth we expect and our results of operations and financial condition could be adversely affected.



To date, our M.I.S. revenues have been below our expectations. To address this, we are investing significantly in the hiring and training of a group of
direct sales representatives that will be dedicated primarily to the sale of our M.I.S. products. We believe that these efforts may allow us to achieve the expected growth in M.I.S. revenues. However, we cannot assure you that our efforts will be
successful. The creation of a direct sales force is very expensive, and if this sales force does not achieve the expected growth in M.I.S. revenues, our results of operations and financial condition could be materially and adversely affected.



We face risks related to the maintenance, upgrading and expansion of our
domestic distribution network.



In domestic markets, we
primarily use independent sales agents for the distribution of our spinal implant products and orthobiologic products. However, because of the agents focus on selling only to spinal surgeons, our orthobiologic products sales have suffered.
Therefore, we are in late stages of building a direct sales force to distribute our orthobiologic products. However, we cannot assure you that we will be successful in our efforts to identify and hire qualified candidates for these positions, or
that such candidates, upon their hiring, will be successful in distributing our orthobiologic products. Additionally, this effort requires a substantial investment and our ongoing profitability could be adversely affected as a result.



We expect to continue to rely primarily on independent agencies for the
domestic distribution of our spinal implant products. Independent commissioned sales agencies may represent other medical devices for a variety of manufacturers and may not dedicate enough time or attention to selling our products. Furthermore, we
expend significant resources to train and educate new independent agencies about our products and our marketing programs. Our ability to recruit independent sales agencies has been aided by some of our competitors replacement of independent
agencies with direct sales representatives. However, our competitors may not continue to utilize direct sales representatives and we cannot assure you that we will continue to be able to attract new or retain our current independent sales agencies.
We also cannot assure you that we will be able to develop an effective distribution network or that our independent agencies will be able to continue to increase sales or maintain current sales levels of our products.



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We may face challenges to our patents and proprietary rights.



We rely on a combination of patents, trade secrets and nondisclosure
agreements to protect our proprietary intellectual property. Our patent positions and those of other medical device companies are uncertain and involve complex and evolving legal and factual questions. We cannot assure you that pending patent
applications will result in issued patents, that patents issued to or licensed by us will not be challenged or circumvented by competitors or that such patents will be found to be valid or sufficiently broad to protect our technology or to provide
us with any competitive advantage. Third parties could also obtain patents that may require licensing for the conduct of our business, and there can be no assurance that the required licenses would be available. We also rely on nondisclosure
agreements with certain employees, consultants and other parties to protect, in part, trade secrets and other proprietary technology. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any
breach, that others will not independently develop substantially equivalent proprietary information or that third parties will not otherwise gain access to our trade secrets and proprietary knowledge. If our intellectual property is not adequately
protected, our competitors could use the intellectual property that we have developed to enhance their products and compete more directly with us, which could result in a decrease in our market share and profits.



We are from time to time involved in litigation to protect or enforce our patents and
proprietary rights, or to defend against claims brought by others, which could be expensive and time consuming.



The medical product industry is characterized by frequent and substantial intellectual property litigation and competitors may resort to intellectual
property litigation as a means of competition. Intellectual property litigation is complex and expensive, and the outcome of such litigation is difficult to predict. We cannot assure you that we will be successful in defending against these claims.
This and any future litigation, regardless of the outcome, could result in substantial expense and significant diversion of the efforts of our technical and management personnel. Additionally, an adverse determination in any such proceeding could
subject us to significant liabilities to third parties, or require us to seek licenses from third parties or pay royalties that may be substantial. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing or selling certain of our products which in turn would have a material adverse effect on our business, financial condition and results of operations. Litigation may also be necessary to enforce
our patents and license agreements, to protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others. For example, we recently filed suit against another medical device manufacturer
claiming that certain of its products infringe several of our spinal implant patents, including U.S. Patent Nos. 5,466,237, 5,474,555, 5,624,442 and 6,224,602, and seeking a declaratory judgment that our products do not infringe its patents. The
medical device manufacturer filed a counterclaim seeking declaratory judgment that it does not infringe our patents, claiming that our patents are invalid and unenforceable, and claiming that we infringe on two of its patents. The court recently
ruled that one of our patents, U.S. Patent No. 5,466,237, is partially invalid. We currently plan to challenge this ruling; however, we cannot assure you that any challenge will be successful. As to our claims for infringement of the remaining
patents, the court has made no ruling. This and any future litigation to protect or enforce our proprietary rights could result in substantial expense and significant diversion of managements attention from our business.



Product introductions or modifications may be delayed or canceled as a result of the FDA
regulatory process, which could cause our sales to decline.



The medical devices we manufacture and market are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. Our failure to comply with such regulations could lead to the imposition of
injunctions, suspensions or loss of regulatory approvals, product recalls, termination of distribution or product seizures. In the most egregious cases, criminal sanctions or closure of our manufacturing facilities are possible. The process of
obtaining regulatory approvals to market a medical device, particularly from the FDA, can be costly and time-consuming, and we cannot assure you that such approvals will be granted on a timely basis, if at all. The regulatory process may delay the
marketing of new products for lengthy periods and impose substantial additional costs or it may prevent the introduction of new products altogether. In particular, the FDA permits commercial distribution of a new medical device only after the FDA
has cleared a 510(k) premarket notification or has approved a Premarket Approval application, or PMA, for such device. The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is
substantially equivalent to other 510(k)-cleared products. The PMA approval process is more costly, lengthy and uncertain than the 510(k) premarket notification process. We cannot assure you that any new products we develop will be subject to the
shorter 510(k) clearance process and therefore significant delays in the introduction of any new products that we



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develop may occur. We anticipate that most of our products that are in final development will be eligible for the 510(k)
premarket notification process. If the FDA does not clear marketing of our products in final development through the 510(k) clearance process, we will be forced to comply with the PMA approval process in order to obtain FDA approval for these
products. If we choose to go through the PMA approval process, there will be significant costs and delays in the introduction of our new products, if they are approved at all. Moreover, foreign governmental authorities have become increasingly
stringent and we may be subject to more rigorous regulation by foreign governmental authorities in the future. Any inability or failure of our foreign independent distributors to comply with the varying regulations or the imposition of new
regulations could restrict such distributors ability to sell our products internationally and thereby adversely affect our business. All products and manufacturing facilities are subject to continual review and periodic inspection by the FDA.
The discovery of previously unknown problems with our company or our products or facilities may result in product labeling restrictions, recall or withdrawal of the products from the market. In addition, the FDA actively enforces regulations
prohibiting the promotion of medical devices for unapproved indications. If the FDA determines that we have marketed our products for off-label use, we could be subject to fines, injunctions or other penalties.



We may be subject to product liability claims and our limited product liability insurance
may not be sufficient to cover the claims, or we may be required to recall our products.



We manufacture medical devices that are used on patients in surgical procedures, and we may be subject to product liability claims and product recalls. The spinal implant industry has been historically litigious and
we face an inherent business risk of financial exposure to product liability claims. Since most of our products are implanted in the human body, manufacturing errors or design defects could result in injury or death to the patient, and could result
in a recall of our products and substantial monetary damages. Any product liability claim brought against us, with or without merit, could result in an increase to our product liability insurance premiums or our inability to secure coverage in the
future. We would also have to pay any amount awarded by a court in excess of our policy limits. In addition, any recall of our products, whether initiated by us or by a regulatory agency, may result in adverse publicity for us that could have a
material adverse effect on our business, financial condition and results of operations. Our product liability insurance policies have various exclusions, and we may be subject to a product liability claim or recall for which we have no insurance
coverage, in which case we may have to pay the entire amount of the award or costs of the recall. Finally, product liability insurance is expensive and may not be available in the future on acceptable terms, or at all.



Possible denial of third-party reimbursement could have a material adverse effect on our
future business, results of operations and financial condition.



In the United States, our products are purchased by hospitals that are reimbursed for the devices provided to their patients by third-party payors, such as governmental programs (e.g., Medicare and Medicaid), private insurance plans and
managed care programs. These third-party payors may deny coverage and reimbursement if they determine that a device used in a procedure was not medically necessary or used in accordance with cost-effective treatment methods, as determined by the
third-party payor, or was used for an unapproved indication. Also, third-party payors are increasingly challenging the prices charged for medical products and services. In addition, we believe the increasing emphasis on managed care in the United
States may put pressure on the prices and usage of our products, which may adversely affect product sales. In international markets, reimbursement and healthcare payment systems vary significantly by country and many countries have instituted price
ceilings on specific product lines. We cannot assure you that our products will be considered cost-effective by third-party payors, that reimbursement will be available or, if available, that the third-party payors reimbursement policies will
not adversely affect our ability to sell our products profitably.



We are
dependent on our suppliers and the loss of any of them could adversely affect our business.



We do not manufacture the components for our spinal implants or instruments or minimally invasive surgery products; rather, we are dependent upon several
suppliers for the manufacturing of such components. Also, the specialized filter material contained in our UltraConcentrator was sole-sourced from a vendor that no longer supplies the material. Although we have not identified any alternate vendors
of the filter material, we have a several year



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supply of the material in inventory and we believe there are suppliers that could supply alternate materials which may
have equivalent function. In the event that a re-engineering of the product were necessary due to a conversion to an alternate material, delays in product availability could occur and significant costs could be incurred, either of which could have a
material adverse effect on our operations. The coral used for our coral-based orthobiologics is also sole source supplied and we have not identified an alternate supplier. We believe that our current supply of coral is sufficient to satisfy our
needs for the next ten years at our current rate of production. However, we cannot assure you that our current supply will be sufficient for our ongoing operations or that we will be able to locate an alternate supply source on reasonable terms or
at all. Any delays in our ability to produce our orthobiologics products could have a material adverse effect on our operations.



The harvesting of coral is subject to regulation which could affect our ability to obtain sufficient quantities of coral in the future.



The harvesting and import of the coral used for our coral-based
orthobiologic products must comply with the requirements of the Convention on International Trade of Endangered Species of Wild Fauna and Flora. As a result, we must register and obtain licensure from the U.S. Department of Fish and Wildlife for
both the import of raw coral and the export of finished product. In the future, regulations could make the import or export of coral or coral-derived products prohibitive and could interrupt our ability to supply product. We cannot assure you that
our supply of raw coral is sufficient, that we will be able to obtain sufficient quantities of coral in the future or that future regulations will not prohibit its use altogether.



Our business could be materially adversely impacted by risks inherent in international markets.



For the year ended December 31, 2003, approximately 20% of our net product
sales were generated outside the United States. We expect that such sales will continue to account for a significant portion of our revenue in the future. Our international sales subject us to other inherent risks, including the following:



| |  | fluctuations in currency exchange rates;
| | - | ----------------------------------------



| |  | regulatory, product approval and reimbursement requirements;
| | - | ------------------------------------------------------------



| |  | tariffs and other trade barriers;
| | - | ---------------------------------



| |  | greater difficulty in accounts receivable collection and longer collection periods;
| | - | -----------------------------------------------------------------------------------



| |  | difficulties and costs of managing foreign distributors;
| | - | --------------------------------------------------------



| |  | reduced protection for intellectual property rights in some countries;
| | - | ----------------------------------------------------------------------



| |  | burdens of complying with a wide variety of foreign laws;
| | - | ---------------------------------------------------------



| |  | the impact of recessions in economies outside the United States;
| | - | ----------------------------------------------------------------



| |  | political and economic instability; and
| | - | ---------------------------------------



| |  | seasonal reductions in business activity during the summer months in Europe and other parts of the world.
| | - | ---------------------------------------------------------------------------------------------------------



If we fail to successfully market and sell our products in international markets, our business, financial condition, results
of operations, and cash flows could be materially and adversely affected.



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Item 2. Properties



We lease two facilities in Irvine, California totaling 64,530 square feet that comprise our headquarters. The annual average lease expense over the five
year term of the lease, which expires January 31, 2008, is $771,000. The lease provides a right to extend the term for an additional five years at the fair market lease rate of the facility on the extension date, but not less than the rate we paid
during the month immediately preceding the commencement of the extension period. We lease a 2,700 square foot warehouse facility in Santa Ana, California. We lease a sales office with approximately 200 square feet located in Miami, Florida. We
believe our current facilities will be adequate to serve our operational needs through 2004.



Item 3. Legal Proceedings



Cross Medical Products v. Medtronic Sofamor Danek



On May 1, 2003, our wholly owned subsidiary, Cross Medical Products, Inc. (Cross), filed an amended complaint in the United States District Court for the Central District of California against Medtronic Sofamor Danek, Inc. and
Medtronic Sofamor Danek USA, Inc. (collectively, Medtronic), which complaint alleges that Medtronic has infringed and continues to infringe Cross U.S. Patent Nos. 5,466,237, 5,474,555 and 5,624,442. These patents relate to
technology embodied in certain components of the SYNERGY Spinal System. The complaint seeks damages for willful past and continuing infringement of the patents. The complaint also seeks a declaratory judgment against Medtronic that Cross is not
infringing U.S. Patent Nos. 5,591,165, 4,641,636, 4,815,453 and 5,005,562. On June 23, 2003, Medtronic filed counterclaims for a declaratory judgment that it does not infringe Cross patents, and that the patents are invalid and unenforceable.



On October 10, 2003, Medtronic filed a motion to amend its
answer and counterclaims to add certain affirmative defenses and causes of action against Cross on behalf of Medtronic and SDGI Holdings, Inc. (SDGI) for past and continued infringement of U.S. Patent Nos. 6,152,927 and 6,533,786 based
on Cross C-TEK anterior cervical plate system.



On
October 22, 2003, the Court, at the request of Cross, dismissed Cross claims for declaratory judgment that Cross is not infringing U.S. Patent Nos. 5,591,165, 4,641,636, 4,815,453 and 5,005,562.



On November 3, 2003, the Court granted Medtronics motion to amend its
answer and counterclaims to allege causes of action against Cross on behalf of Medtronic and SDGI for past and continued infringement of U.S. Patent Nos. 6,152,927 and 6,533,786 based on Cross C-TEK anterior cervical plate system.



On October 22, 2003, Cross, Interpore Cross International, Inc.
(Interpore Cross), and Interpore Orthopaedics, Inc. (Interpore Orthopaedics) filed an amended complaint in the United States District Court for the Central District of California against Medtronic and SDGI, which complaint
alleges that Medtronic has infringed and continues to infringe Cross U.S. Patent No. 6,224,602. That patent relates to technology embodied in certain components of the C-TEK anterior cervical plate system. The complaint seeks damages for
willful past and continuing infringement of the patent. The complaint also seeks a declaratory judgment against Medtronic and SDGI that Interpore Cross and Interpore Orthopaedics are not infringing U.S. Patent Nos. 6,152,927 and 6,533,786.



On March 1, 2004, the Court granted Medtronics motion
for summary judgment of the invalidity of Cross U.S. Patent No. 5,466,237, ruling that this patent was partially invalid. Cross is exploring strategies in response to this ruling and currently plans to challenge it. However, there can be no
assurance that Cross will be successful in any such challenge.



Interpore is unable at this time to predict the outcome of this litigation.



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Cross Medical Products v. Puno and Byrd



On December 4, 2003, Drs. Puno and Byrd filed a motion to intervene in the
Cross litigation with Medtronic claiming ownership of Cross U.S. Patent Nos. 5,466,237, 5,474,555, and 5,624,442 patents, as well as other of Cross patents not at issue in this litigation, on the basis of a purported termination by
them of certain royalty agreements with Cross. On December 10, 2003, Cross filed a demand for arbitration of the claims raised by Drs. Puno and Byrd with the American Arbitration Association under the terms of the royalty agreements seeking a
declaration that Drs. Puno and Byrd have no interest in any of Cross patents, and no interest in any of the settlement recovery received from the settlement of Cross lawsuit with DePuy Spine, Inc. in January 2003. On January 5, 2004,
Drs. Puno and Byrd filed a counterclaim in the arbitration claiming entitlement to Cross U.S. Patent Nos. 5,466,237, 5,474,555, 5,624,442, 5,496, 321, and 5,360,431 Patents, and at least $21,000,000 from Cross settlement with DePuy
Spine. On January 26, 2004, Cross entered into an agreement with Drs. Puno and Byrd clarifying Cross ownership of all of its patents and the right of Drs. Puno and Byrd to receive royalties on certain of Cross products. On January 29,
2004, Drs. Puno and Byrd withdrew their motion to intervene in the Medtronic litigation and the parties dismissed the arbitration. Separately, Cross entered into an agreement with Drs. Puno and Byrd to prepay royalties remaining under the existing
royalty agreements with respect to certain other Cross products in the amount of $2.5 million, and the parties agreed to terminate those royalty agreements.



Abrams v. Interpore International, Inc., et al



On March 8, 2004, one of Interpores alleged stockholders filed a putative class action lawsuit in the Superior Court of the State of California,
County of Orange, against Interpore and each member of its board of directors. The lawsuit, Abrams v. Interpore International, Inc., et al., (Case No. 04CC00093), alleges that Interpore and its directors breached the fiduciary duties of care,
loyalty, candor, and independence owed to Interpores stockholders in connection with the proposed acquisition of Interpore by Biomet, Inc. Specifically, the lawsuit alleges that Interpore and its directors failed to take steps to maximize the
value of Interpore, took steps to avoid competitive bidding, gave Biomet an unfair advantage, failed to solicit other potential acquirors or alternative transactions and failed to properly value Interpore. The plaintiff seeks to enjoin Interpore
from proceeding with the proposed acquisition by Biomet. Additionally, the complaint seeks certification of a class, a declaration that Interpore and its directors have breached their fiduciary duties in entering into the proposed transaction with
Biomet, an injunction barring the proposed acquisition and directing Interpore to pursue a transaction in the best interests of its stockholders, a constructive trust upon any benefits improperly received by Interpore or any of its directors as a
result of the proposed acquisition, costs, and attorneys and experts fees. Interpore believes that this lawsuit is without merit and intends to vigorously defend against the allegations in the complaint.



Aside from the aforementioned matters, the nature of Interpores
business subjects it to product liability and various other legal proceedings from time to time. Interpore is currently involved in legal proceedings incidental to the normal conduct of its business. It does not believe that any liabilities relating
to the legal proceedings to which it is a party are likely to be, individually or in the aggregate, material to its consolidated financial condition or results of operations.



Item 4. Submission of Matters to a Vote of Security Holders



None.



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##### Table of Contents

PART II



Item 5. Market for Registrants Common Stock and Related Stockholder Matters



Our common stock trades on The Nasdaq Stock Market under the symbol BONZ. The following table sets forth, for
the periods indicated, the intra-day high and low sales prices for our common stock on The Nasdaq Stock Market:



|                             |  |      |       |     |   |      
|---------------------------- |  | ---- | ----- | --- | - | -----
|                             |  | High |       | Low
|Year Ended December 31, 2002 |  |      |       |     |   |      
|First Quarter                |  | $    | 12.95 |     | $ | 8.15 
|Second Quarter               |  | $    | 11.50 |     | $ | 7.23 
|Third Quarter                |  | $    | 9.54  |     | $ | 4.95 
|Fourth Quarter               |  | $    | 7.95  |     | $ | 4.68 
|                             |  |     
|Year Ended December 31, 2003 |  |      |       |     |   |      
|First Quarter                |  | $    | 8.45  |     | $ | 5.53 
|Second Quarter               |  | $    | 13.83 |     | $ | 6.80 
|Third Quarter                |  | $    | 20.59 |     | $ | 11.93
|Fourth Quarter               |  | $    | 16.97 |     | $ | 10.19



On February 27, 2004,
the closing sale price for our common stock as reported on The Nasdaq Stock Market was $11.09 The number of record holders of our common stock as of February 27, 2004 was 411.



We currently do not pay any dividends on our common stock and our Board of Directors has no present intention to pay cash
dividends. The Board of Directors intends to use any earnings for the development and expansion of our business.



Recent Sales of Unregistered Securities



On October 22, 2003, we issued 25,000 shares of common stock to Andrew G. Hood upon his exercise of a warrant to purchase shares of common stock at an
exercise price of $7.125 per share. The shares were issued in exchange for payment of the aggregate exercise price of $178,000. In issuing the underlying common stock to Mr. Hood, we relied on the exemption from registration set forth in Section
4(2) of the Securities Act of 1933, as amended.



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##### Table of Contents

Item 6. Selected Financial Data



The table below presents the selected consolidated financial data of Interpore International, Inc. This information has been
prepared using the consolidated financial statements of Interpore International, Inc. as of and for the years ended December 31, 1999, 2000, 2001, 2002 and 2003.



|                                                                      |  |                                       |        |      |   |        |  |      |        |  |      |        |   |  |   |       
|--------------------------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------ |  | ---- | ------ |  | ---- | ------ | - |  | - | ------
|                                                                      |  | Year ended December 31,              
|                                                                      |  | 1999                                  |        | 2000 |   | 2001   |  | 2002 |        |  | 2003
|                                                                      |  | (in thousands, except per share data)
|Statement of Operations Data:                                         |  |                                       |        |      |   |        |  |      |        |  |      |        |   |  |   |       
|Net revenues                                                          |  | $                                     | 38,856 |      | $ | 44,319 |  | $    | 51,296 |  | $    | 58,923 |   |  | $ | 70,718
|Cost of goods sold                                                    |  |                                       | 11,645 |      |   | 13,460 |  |      | 14,355 |  |      | 16,444 |   |  |   | 20,249
|                                                                      |  |                                       |        |      |   |        |  |      |        |  |      |        |   |  |   |       
|Gross profit                                                          |  |                                       | 27,211 |      |   | 30,859 |  |      | 36,941 |  |      | 42,479 |   |  |   | 50,469
|Total operating expenses                                              |  |                                       | 22,521 |      |   | 25,256 |  |      | 31,026 |  |      | 39,193 |   |  |   | 43,221
|                                                                      |  |                                       |        |      |   |        |  |      |        |  |      |        |   |  |   |       
|Income from operations                                                |  |                                       | 4,690  |      |   | 5,603  |  |      | 5,915  |  |      | 3,286  |   |  |   | 7,248 
|Total interest and other income, net                                  |  |                                       | 515    |      |   | 991    |  |      | 1,010  |  |      | 668    |   |  |   | 16,087
|                                                                      |  |                                       |        |      |   |        |  |      |        |  |      |        |   |  |   |       
|Income before taxes                                                   |  |                                       | 5,205  |      |   | 6,594  |  |      | 6,925  |  |      | 3,954  |   |  |   | 23,335
|Income tax provision (benefit)                                        |  |                                       | 407    |      |   | 2,461  |  |      | 2,667  |  |      | (190   | ) |  |   | 8,401 
|                                                                      |  |                                       |        |      |   |        |  |      |        |  |      |        |   |  |   |       
|Income from continuing operations                                     |  | $                                     | 4,798  |      | $ | 4,133  |  | $    | 4,258  |  | $    | 4,144  |   |  | $ | 14,934
|                                                                      |  |                                       |        |      |   |        |  |      |        |  |      |        |   |  |   |       
|Income from continuing operations per share:                          |  |                                       |        |      |   |        |  |      |        |  |      |        |   |  |   |       
|Basic                                                                 |  | $                                     | .36    |      | $ | .29    |  | $    | .27    |  | $    | .24    |   |  | $ | .85   
|Diluted                                                               |  | $                                     | .35    |      | $ | .27    |  | $    | .27    |  | $    | .23    |   |  | $ | .79   
|Shares used in computing income from continuing operations per share: |  |                                       |        |      |   |        |  |      |        |  |      |        |   |  |   |       
|Basic                                                                 |  |                                       | 13,506 |      |   | 14,043 |  |      | 15,544 |  |      | 17,238 |   |  |   | 17,642
|Diluted                                                               |  |                                       | 13,876 |      |   | 15,140 |  |      | 15,985 |  |      | 17,920 |   |  |   | 18,785
|                                                                      | 
|                                                                      |  | As of December 31,                   
|                                                                      |  | 1999                                  |        | 2000 |   | 2001   |  | 2002 |        |  | 2003
|Balance Sheet Data:                                                   |  |                                       |        |      |   |        |  |      |        |  |      |        |   |  |   |       
|Total cash, cash equivalents and short-term investments               |  | $                                     | 9,774  |      | $ | 14,610 |  | $    | 6,538  |  | $    | 1,810  |   |  | $ | 13,488
|Total assets                                                          |  |                                       | 40,793 |      |   | 45,233 |  |      | 64,562 |  |      | 77,242 |   |  |   | 90,818
|Short-term obligations                                                |  |                                       | 15     |      |   | 10     |  |      |       |  |      |       |   |  |   |      
|Long-term obligations                                                 |  |                                       | 3,165  |      |   |       |  |      |       |  |      | 5,818  |   |  |   |      
|Total stockholders equity                                            |  |                                       | 33,237 |      |   | 41,858 |  |      | 58,930 |  |      | 65,216 |   |  |   | 84,417



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##### Table of Contents

Item 7. Managements Discussion and Analysis of Results of Operations and Financial Condition



You should read the following discussion of our financial condition and
results of operations in conjunction with the consolidated financial statements and related notes to those statements appearing elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and
uncertainties, including those discussed above under the subheading Certain Business Considerations.



Financial Overview



Our revenues are generated from the sale of medical device products and from the receipt of royalty payments from third parties to which we have granted
licenses to certain of our spinal implant patents. Our medical device products fall into three principal categoriesspinal implant products, orthobiologic products and minimally invasive surgery, or M.I.S., products. Our spinal implant products
consist of titanium or stainless steel hooks, rods, plates, spacers and screws and related instruments required for the surgeon to assemble a construct which restores the natural anatomy of the spine, keeping it immobilized while a bone graft
eventually fuses the vertebrae. Our orthobiologic products consist of bone graft substitute materials and products used to derive Autologous Growth Factors®, or AGF®. AGF fibrinogen-rich extract is used to provide faster, more complete bone growth and enhance the performance of our bone graft products. Our M.I.S.
products consist of instruments and devices used to deliver biocompatible materials into bony structures in a minimally invasive procedure.



All of our operations are located in the United States; however, we sell our products to customers both within and outside the United States. Within the
United States, we distribute our products through independent agencies and direct sales representatives. The independent agencies and our direct sales representatives provide delivery and consultative services to our surgeon and hospital customers
and receive commissions based on sales in their territories. The commissions are reflected in our income statement within selling and marketing expense.



For our spinal implant products and M.I.S. products, we invoice hospitals directly following a surgical procedure in which our products are used. These
products are made available to hospitals from consignment inventories maintained by our independent agencies and direct sales representatives, or from loaner implant sets that we ship from our facility. For our orthobiologic products, we generally
ship directly to hospitals from our facility, and we invoice hospitals upon shipment. Our AGF and ACCESS® processors are usually placed on consignment at hospitals; the hospitals are invoiced for AGF and ACCESS disposables.



Outside the United States, we sell our products directly to distributors who maintain an inventory of our products. We
record revenue at the time of shipment to the distributor at prices reflecting a discount from our U.S. list prices. The distributors provide service to the surgeons and hospitals, deliver products and invoice hospitals directly at prices determined
by the distributors.



Because our revenues from U.S. hospitals
are primarily at list price, and our revenues from international distributors are at a discount to U.S. list prices, our overall gross margin is subject to fluctuation based on our domestic versus international sales mix, with domestic gross margins
being somewhat higher than international gross margins.



Recent Developments



On March 7, 2004, we entered into a definitive agreement
with Biomet, Inc. under which Biomet will acquire all of our outstanding common stock for cash in an amount equal to $14.50 per share, which represents a total equity value of approximately $280 million. Although the transaction is subject to
regulatory approval, approval by our stockholders and other customary closing considerations, we expect the transaction to close in the second quarter of 2004.



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##### Table of Contents

Critical Accounting Policies and Estimates



Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates including those related to product returns, bad debts, inventories, intangible assets, income taxes and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or conditions.



We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial
statements:



| |  | Revenue from sales of product where the customer immediately accepts title is recorded at the time of shipment. Revenue from sales of consigned inventory is recorded upon receipt of
written acknowledgement from independent agencies, direct sales representatives or customers that the product has been used in a surgical procedure. Provision is made currently for estimated product returns based on historical experience and other
known factors. Royalty income is recorded upon receipt of royalty payments from third parties to which we have granted licenses to certain of our spinal implant patents. These licenses provide for royalties calculated at a negotiated percentage of
sales of specified spinal implant products by the third parties.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We provide an inventory reserve for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs would be required.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We have significant intangible assets, including goodwill. The determination of related estimated useful lives and whether or not these assets are impaired involves significant
judgments. Changes in strategy or market conditions could significantly impact these judgments and require adjustments to recorded asset balances.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We currently have deferred tax assets, which are subject to periodic recoverability assessments. Realization of our deferred tax assets is principally dependent upon our achievement
of projected future taxable income. We evaluate the realizability of the deferred tax assets annually.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Results of Operations



The following table presents our results of operations as percentages:



|                           |  |                                                   |   |  |                   |   |  |       |   |  |              |    |  |              |  
|-------------------------- |  | ------------------------------------------------- | - |  | ----------------- | - |  | ----- | - |  | ------------ | -- |  | ------------ | -
|                           |  | Percentage of Net RevenuesYear ended December 31, |   |  | Percentage Change |  
|                           |  | 2001                                              |   |  | 2002              |   |  | 2003  |   |  | 2002 vs.2001 |    |  | 2003 vs.2002 |  
|Net revenues               |  | 100.0                                             | % |  | 100.0             | % |  | 100.0 | % |  | 14.9         | %  |  | 20.0         | %
|Cost of goods sold         |  | 28.0                                              |   |  | 27.9              |   |  | 28.6  |   |  | 14.6         |    |  | 23.1         |  
|                           |  |                                                   |   |  |                   |   |  |       |   |  |              |    |  |              |  
|Gross profit               |  | 72.0                                              |   |  | 72.1              |   |  | 71.4  |   |  | 15.0         |    |  | 18.8         |  
|                           |  |                                                   |   |  |                   |   |  |       |   |  |              |    |  |              |  
|Operating expenses:        |  |                                                   |   |  |                   |   |  |       |   |  |              |    |  |              |  
|Research and development   |  | 13.2                                              |   |  | 13.3              |   |  | 11.8  |   |  | 16.3         |    |  | 6.5          |  
|Selling and marketing      |  | 36.3                                              |   |  | 40.8              |   |  | 39.1  |   |  | 28.7         |    |  | 15.1         |  
|General and administrative |  | 11.0                                              |   |  | 12.4              |   |  | 10.2  |   |  | 30.3         |    |  | (1.5         | )
|                           |  |                                                   |   |  |                   |   |  |       |   |  |              |    |  |              |  
|Total operating expenses   |  | 60.5                                              |   |  | 66.5              |   |  | 61.1  |   |  | 26.3         |    |  | 10.3         |  
|                           |  |                                                   |   |  |                   |   |  |       |   |  |              |    |  |              |  
|Income from operations     |  | 11.5                                              | % |  | 5.6               | % |  | 10.3  | % |  | (44.4        | )% |  | 120.6        | %
|                           |  |                                                   |   |  |                   |   |  |       |   |  |              |    |  |              |  



Year Ended December 31, 2003
Compared to Year Ended December 31, 2002



For the year
ended December 31, 2003, net revenues of $70.7 million were $11.8 million, or 20.0%, higher than net revenues of $58.9 million for the year ended December 31, 2002. Net product sales for the year ended December 31, 2003 of $67.5 million were $8.6
million or 14.6% higher than net product sales of $58.9 million for the year ended December 31, 2002. The following table presents net revenues by product sales by category and royalty income (in thousands):



|                             |  |                         |        |        |   |        |  |         |        |  |      |  
|---------------------------- |  | ----------------------- | ------ | ------ | - | ------ |  | ------- | ------ |  | ---- | -
|                             |  | Year ended December 31, |        | Change |  
|                             |  | 2002                    |        | 2003   |   | Amount |  | Percent |       
|Spinal implant product sales |  | $                       | 36,790 |        | $ | 44,557 |  | $       | 7,767  |  | 21.1 | %
|Orthobiologic product sales  |  |                         | 18,103 |        |   | 18,671 |  |         | 568    |  | 3.1  | %
|M.I.S. product sales         |  |                         | 4,030  |        |   | 4,278  |  |         | 248    |  | 6.2  | %
|                             |  |                         |        |        |   |        |  |         |        |  |      |  
|Net product sales            |  |                         | 58,923 |        |   | 67,506 |  |         | 8,583  |  | 14.6 | %
|Royalty income               |  |                         |       |        |   | 3,212  |  |         | 3,212  |  | n/a  |  
|                             |  |                         |        |        |   |        |  |         |        |  |      |  
|Net revenues                 |  | $                       | 58,923 |        | $ | 70,718 |  | $       | 11,795 |  | 20.0 | %
|                             |  |                         |        |        |   |        |  |         |        |  |      |  



Sales of spinal
implant products increased in the year ended December 31, 2003 by $7.8 million, or 21.1%, to $44.6 million, compared to $36.8 million for the year ended December 31, 2002. The increase is primarily attributable to growth in sales of C-TEK, GEO
STRUCTURE and SYNERGY products as well as sales of our recently released ALTIUS and TPS-TL products.



Sales of orthobiologic products increased by $568,000, or 3.1%, to $18.7 million for the year ended December 31, 2003, compared to $18.1 million for the
year ended December 31, 2002. The sales growth resulted from sales of our INTERGRO allograft putty and paste products, which were introduced in 2002 and 2003, partially offset by a decline in sales of our synthetic bone graft products.



Sales of M.I.S. products increased by $248,000, or 6.2%, to $4.3 million
for the year ended December 31, 2003, compared to $4.0 million for the year ended December 31, 2002. In the fourth quarter of 2002, we initiated significant organization changes in our M.I.S business; beginning with the closing of the M.I.S. related
facility in Leesburg, Virginia. In early 2003 we hired two domestic sales division managers for our M.I.S. products and began to expand the direct sales force which is exclusively focused on selling our M.I.S. products. The length of time it takes
for a newly-hired direct sales representative to achieve a satisfactory level of monthly sales has been greater than we had anticipated. Nonetheless, we believe that these efforts are necessary to help generate growth in sales in this product
category. However, we cannot assure you that our efforts will ultimately result in the sales growth we expect in M.I.S. products.



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##### Table of Contents

Domestic sales for all product categories increased $5.7 million, or 11.7%, to $54.1 million for the year
ended December 31, 2003, compared to $48.4 million for the year ended December 31, 2002. International sales for the year ended December 31, 2003 increased $2.9 million, or 27.9% to $13.4 million from $10.5 million for the year ended December 31,
2002.



During the year ended December 31, 2003, we received
royalty payments totaling $3.2 million from third parties to which we have granted licenses to certain of our spinal implant patents. This royalty payment stream began in the second quarter of 2003.



For the year ended December 31, 2003, the gross profit was 71.4% of net
revenues compared to 72.1% of net revenues for the year ended December 31, 2002. However, before accounting for the effect of the royalty income, the gross profit as a percentage of net product sales declined from 72.1% in the year ended December
31, 2002 to 70.0% in the year ended December 31, 2003. The decline reflects the comparatively lower gross margin on sales of certain recently released products, primarily INTERGRO allograft products and ACCESS processors.



Total operating expenses for the year ended December 31, 2003 increased by
$4.0 million, or 10.3%, to $43.2 million, compared to $39.2 million during the same period of 2002. However, as a percentage of net revenues, total operating expenses decreased from 66.5% in the year ended December 31, 2002 to 61.1% in the year
ended December 31, 2003. Research and development expenses in 2003 increased by $508,000, or 6.5% due primarily to efforts related to the development of potential new products. Selling and marketing expenses increased $3.6 million, or 15.1%,
primarily due to our investment in additional direct sales personnel for our orthobiologic and M.I.S. products. General and administrative expenses decreased in 2003 by $109,000, or 1.5%.



Total interest and other income increased to $16.1 million for the year ended December 31, 2003, compared to $668,000 during
the same period of 2002. Other income in 2003 included a $15 million payment from DePuy Spine, received in January 2003, in settlement of patent litigation.



The effective tax rate for the year ended December 31, 2003 was 36.0%. Because of the significant tax benefit in 2002 resulting from tax savings projects
undertaken during that year, we recorded a tax benefit for the year ended December 31, 2002 of $190,000.



Year Ended December 31, 2002 Compared to Year Ended December 31, 2001



For the year ended December 31, 2002, net revenues of $58.9 million were $7.6 million, or 14.9%, higher than net revenues of $51.3 million for the year
ended December 31, 2001. The following table presents net revenues by product sales category (in thousands):



|                             |  |                        |        |        |   |        |  |   |         |   |  |       |   
|---------------------------- |  | ---------------------- | ------ | ------ | - | ------ |  | - | ------- | - |  | ----- | --
|                             |  | Year endedDecember 31, |        | Change |  
|                             |  | 2001                   |        | 2002   |   | Amount |  |   | Percent |  
|Spinal implant product sales |  | $                      | 29,490 |        | $ | 36,790 |  | $ | 7,300   |   |  | 24.8  | % 
|Orthobiologic product sales  |  |                        | 20,151 |        |   | 18,103 |  |   | (2,048  | ) |  | (10.2 | )%
|                             |  |                        |        |        |   |        |  |   |         |   |  |       |   
|M.I.S. product sales         |  |                        | 1,655  |        |   | 4,030  |  |   | 2,375   |   |  | 143.5 | % 
|                             |  |                        |        |        |   |        |  |   |         |   |  |       |   
|Net revenues                 |  | $                      | 51,296 |        | $ | 58,923 |  | $ | 7,627   |   |  | 14.9  | % 
|                             |  |                        |        |        |   |        |  |   |         |   |  |       |   



Sales of spinal
implant products increased in the year ended December 31, 2002 by $7.3 million, or 24.8%, to $36.8 million, compared to $29.5 million for the year ended December 31, 2001. The increase was attributable to increased sales of the SYNERGY Spinal
System, increased sales of our C-TEK Anterior Cervical Plate System and sales of our GEO STRUCTURE Device which was released in 2002.



Sales of orthobiologic products decreased by $2.0 million, or 10.2%, to $18.1 million for the year ended December 31, 2002, compared to $20.1 million for
the year ended December 31, 2001. Sales of our synthetic bone graft products decreased by 13.1% from sales in 2001. We believe that the decline in sales of our orthobiologic products resulted primarily from the focus of our independent agencies on
the spinal implant market.



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##### Table of Contents

Sales of M.I.S. products increased by $2.4 million to $4.0 million for the year ended December 31, 2002,
compared to $1.7 million for the year ended December 31, 2001. This product line was acquired in July 2001, and accordingly, the 2001 period only included sales since the acquisition date.



Domestic sales for all product categories increased $8.5 million, or 21.4%,
to $48.4 million for the year ended December 31, 2002, compared to $39.9 million for the year ended December 31, 2001. International sales for the year ended December 31, 2002 decreased 7.9%, or $904,000, to $10.5 million from $11.4 million for the
year ended December 31, 2001.



For the year ended December 31,
2002, the gross margin as a percentage of net revenues was 72.1%, compared to 72.0% for the year ended December 31, 2001.



Total operating expenses for the year ended December 31, 2002 increased by $8.2 million, or 26.3%, to $39.2 million, compared to $31.0 million during the
same period of 2001. As a percentage of net revenues, total operating expenses increased from 60.5% in the year ended December 31, 2001 to 66.5% in the year ended December 31, 2002 because the rate of operating expense growth exceeded the sales
growth rate. The greatest operating expense growth occurred in the selling and marketing and general and administrative expense categories. The selling and marketing expense increase of 28.7% over 2001 reflects our investment in additional sales
personnel for our M.I.S. products. Additionally, 2002 included a full year of M.I.S. selling expenses compared to less than a half year of similar expense in 2001. General and administrative expenses increased in 2002 by $1.7 million, or 30.3%,
primarily as the result of legal expenses associated with the DePuy Spine litigation and increased products liability insurance premiums on higher sales. Also, research and development expenses in 2002 increased by 16.3%, or $1.1 million, due
primarily to efforts related to the development of potential new products and a full year of expenses related to our M.I.S. business.



Total interest and other income decreased $342,000, or 33.9%, to $668,000 for the year ended December 31, 2002, compared to $1.0 million for year ended
December 31, 2001. The decrease in interest income resulted from lower average cash and cash equivalents balances in 2002.



Because of the significant tax benefit in 2002 resulting from tax savings projects undertaken during 2002, we recorded an income tax benefit of $190,000
for the year ended December 31, 2002. The effective tax rate for the year ended December 31, 2001 was 38.5%.



Liquidity and Capital Resources



At December 31, 2003, cash, cash equivalents and short-term investments totaled $13.5 million, an increase of $11.7 million from $1.8 million at December 31, 2002. We have a $10.0 million secured revolving bank line of credit which expires
in June 2005. At December 31, 2002, we had borrowed approximately $5.8 million under this facility to fund our 2002 working capital needs, which were driven primarily by significant investments in inventories to support new product launches. On
January 27, 2003, we received the $15 million payment from DePuy Spine in settlement of patent litigation, some of which was used to pay off the outstanding balance on our line of credit. We currently have no outstanding borrowings under our line of
credit.



We plan to continue making significant investments in
initial inventory levels for new products. We also intend to continue to invest in the development of our business. We believe we currently possess sufficient resources, including our revolving bank line of credit, to meet the cash requirements of
our operations for at least the next year. In addition, we have used and may continue to use our cash, our common stock, or a combination of both to pay for purchased technologies, product lines, mergers and acquisitions. Some of these activities
may require resources in excess of those which we currently possess, and we cannot assure you that we will be able to raise additional capital on satisfactory terms, if at all.



At December 31, 2003, we had no material commitments for capital expenditures.



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##### Table of Contents

Contractual Obligations



The following table presents our contractual obligations as of December 31, 2003 (in thousands):



|                          |  |                        |       |                 |   |           |  |           |       |                   |   |    |  |   |  
|------------------------- |  | ---------------------- | ----- | --------------- | - | --------- |  | --------- | ----- | ----------------- | - | -- |  | - | -
|                          |  | Payments due by period
|Contractual Obligations   |  | Total                  |       | Less than 1year |   | 1-3 years |  | 4-5 years |       | More than 5 years
|Long-term debt            |  | $                      |      |                 | $ |          |  | $         |      |                   | $ |   |  | $ | 
|Capital lease obligations |  |                        |      |                 |   |          |  |           |      |                   |   |   |  |   | 
|Operating leases          |  |                        | 3,388 |                 |   | 828       |  |           | 2,490 |                   |   | 70 |  |   | 
|Purchase obligations      |  |                        | 2,252 |                 |   | 2,252     |  |           |      |                   |   |   |  |   | 
|                          |  |                        |       |                 |   |           |  |           |       |                   |   |    |  |   |  
|Total                     |  | $                      | 5,640 |                 | $ | 3,080     |  | $         | 2,490 |                   | $ | 70 |  | $ | 
|                          |  |                        |       |                 |   |           |  |           |       |                   |   |    |  |   |  



Item 7a. Quantitative and
Qualitative Disclosures About Market Risk



We are exposed
to market risk for changes in interest rates related primarily to our cash and cash equivalent balances and marketable securities. However, as all of our investments are in short-term instruments, we believe that we have no material market risk
exposure.



Item 8. Financial Statements and Supplementary Data



The Financial Statements and Supplementary Data of
Interpore International, Inc. are listed and included under Item 16 of this report.



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



None.



Item 9A. Controls and Procedures



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.



As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the quarter ended December 31, 2003. Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.



There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial reporting.



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PART III



Item 10. Directors and Executive Officers of the Registrant



There is hereby incorporated herein by reference the information appearing under the caption Election of Directors in the Proxy Statement for the
Interpore International 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 29, 2004.



Item 11. Executive Compensation



There is hereby incorporated herein by reference the information appearing under the caption Executive Compensation in the Proxy Statement for the
Interpore International 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 29, 2004.



Item 12. Security Ownership of Certain Beneficial Owners and Management



There is hereby incorporated herein by reference the information appearing under the caption Security Ownership of Certain Beneficial Owners and
Management in the Proxy Statement for the Interpore International 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 29, 2004.



Item 13. Certain Relationships and Related Transactions



There is hereby incorporated by reference the information appearing under
the captionCertain Relationships and Related Transactions in the Proxy Statement for the Interpore International 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 29, 2004.



Item 14. Principal Accountant Fees and Services



There is hereby incorporated by reference the information appearing under
the caption Independent Auditor Fee Information in the Proxy Statement for the Interpore International 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 29, 2004.



34



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PART IV



Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K



| | (a) | (1) The following financial statements are referenced in Part II Item 8 and submitted herewith:
| | --- | -----------------------------------------------------------------------------------------------



|                                                                                                     |  |            
|---------------------------------------------------------------------------------------------------- |  | -----------
|                                                                                                     |  | Page Number
|                                                                                                     | 
|Report of Independent Auditors                                                                       |  | F-2        
|                                                                                                     | 
|Consolidated Balance Sheets at December 31, 2002 and 2003                                            |  | F-3        
|                                                                                                     | 
|Consolidated Statements of Income for the Years Ended December 31, 2001, 2002 and 2003               |  | F-4        
|                                                                                                     | 
|Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2001, 2002 and 2003 |  | F-5        
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2002 and 2003           |  | F-6        
|                                                                                                     | 
|Notes to Consolidated Financial Statements                                                           |  | F-7        



| | (2) | The following financial statement schedule for the years ended December 31, 2001, 2002 and 2003 is submitted herewith:
| | --- | ----------------------------------------------------------------------------------------------------------------------



Schedule IIValuation and Qualifying Accounts



All other schedules are omitted because they are not applicable or the
required information is presented in the financial statements or notes thereto.



| | (3) | The list of exhibits contained in the Index to Exhibits is submitted herewith.
| | --- | ------------------------------------------------------------------------------



| | (b) | Reports on Form 8-K
| | --- | -------------------



None.



35



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.



INTERPORE INTERNATIONAL, INC.By:

/s/ DAVID C. MERCERDavid C. Mercer Chairman and Chief Executive Officer




Date: March 12, 2004



Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                               |  |                                                                                                                |  |               
|---------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | --------------
|                                               |  | Title                                                                                                          |  | Date          
|                                               |  |                                                                                                               
|/s/ DAVID C. MERCERDavid C. Mercer             |  | Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)                      |  | March 12, 2004
|                                               |  |                                                                                                               
|/s/ JOSEPH A. MUSSEYJoseph A. Mussey           |  | President, Chief Operating Officer and Director                                                                |  | March 12, 2004
|                                               |  |                                                                                                               
|/s/ RICHARD L. HARRISONRichard L. Harrison     |  | Sr. Vice PresidentFinance, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) |  | March 12, 2004
|                                               |  |                                                                                                               
|/s/ DAVID W. CHONETTEDavid W. Chonette         |  | Director                                                                                                       |  | March 12, 2004
|                                               |  |                                                                                                               
|/s/ WILLIAM A. EISENECHERWilliam A. Eisenecher |  | Director                                                                                                       |  | March 12, 2004
|                                               |  |                                                                                                               
|/s/ DANIEL A. FUNK, M.D.Daniel A. Funk, M.D.   |  | Director                                                                                                       |  | March 12 2004 
|                                               |  |                                                                                                               
|/s/ LEWIS PARKERLewis Parker                   |  | Director                                                                                                       |  | March 12, 2004
|                                               |  |                                                                                                               
|/s/ ROBERT J. WILLIAMSRobert J. Williams       |  | Director                                                                                                       |  | March 12, 2004





36



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INTERPORE INTERNATIONAL, INC.



INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Report of Independent Auditors                                                                       |  | F-2 
|                                                                                                     | 
|Consolidated Balance Sheets at December 31, 2002 and 2003                                            |  | F-3 
|                                                                                                     | 
|Consolidated Statements of Income for the Years Ended December 31, 2001, 2002 and 2003               |  | F-4 
|                                                                                                     | 
|Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2001, 2002 and 2003 |  | F-5 
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2002 and 2003           |  | F-6 
|                                                                                                     | 
|Notes to Consolidated Financial Statements                                                           |  | F-7 
|                                                                                                     | 
|Schedule IIValuation and Qualifying Accounts                                                        |  | F-20



F-1



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##### Table of Contents

R
EPORT OF INDEPENDENT AUDITORS



Board of Directors

Interpore International, Inc.



We have audited the accompanying consolidated balance sheets of Interpore International, Inc. as of December 31, 2002 and 2003, and the related
consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.



We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Interpore International, Inc. at December 31, 2002 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



/s/ ERNST & YOUNG LLP



Orange County, California

February 4, 2004,

except for Notes 8 and 10, as to which the date is

March 8, 2004



F-2



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##### Table of Contents

I
NTERPORE INTERNATIONAL, INC.



CONSOLIDATED BALANCE SHEETS



(in thousands,
except share data)



|                                                                                                                                                                            |  |              |        |   |      |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                                                                                                                                                            |  | December 31, |       
|                                                                                                                                                                            |  | 2002         |        |   | 2003 |  
|Assets                                                                                                                                                                      |  |              |        |   |      |   |        |  
|Current assets:                                                                                                                                                             |  |              |        |   |      |   |        |  
|Cash and cash equivalents                                                                                                                                                   |  | $            | 1,810  |   |      | $ | 5,837  |  
|Short-term investments                                                                                                                                                      |  |              |       |   |      |   | 7,651  |  
|Accounts receivable, less allowance for doubtful accounts of $797 and $411 in 2002 and 2003, respectively                                                                   |  |              | 12,120 |   |      |   | 13,213 |  
|Inventories                                                                                                                                                                 |  |              | 31,995 |   |      |   | 32,982 |  
|Income taxes receivable                                                                                                                                                     |  |              | 512    |   |      |   | 1,189  |  
|Prepaid expenses                                                                                                                                                            |  |              | 1,484  |   |      |   | 2,388  |  
|Deferred income taxes                                                                                                                                                       |  |              | 2,154  |   |      |   | 2,169  |  
|                                                                                                                                                                            |  |              |        |   |      |   |        |  
|Total current assets                                                                                                                                                        |  |              | 50,075 |   |      |   | 65,429 |  
|Property, plant and equipment, net                                                                                                                                          |  |              | 3,410  |   |      |   | 2,847  |  
|Deferred income taxes                                                                                                                                                       |  |              | 799    |   |      |   |       |  
|Goodwill                                                                                                                                                                    |  |              | 20,201 |   |      |   | 19,883 |  
|Other intangible assets, net                                                                                                                                                |  |              | 2,548  |   |      |   | 2,572  |  
|Other assets                                                                                                                                                                |  |              | 209    |   |      |   | 87     |  
|                                                                                                                                                                            |  |              |        |   |      |   |        |  
|Total assets                                                                                                                                                                |  | $            | 77,242 |   |      | $ | 90,818 |  
|                                                                                                                                                                            |  |              |        |   |      |   |        |  
|Liabilities and stockholders equity                                                                                                                                        |  |              |        |   |      |   |        |  
|Current liabilities:                                                                                                                                                        |  |              |        |   |      |   |        |  
|Accounts payable                                                                                                                                                            |  | $            | 2,932  |   |      | $ | 1,925  |  
|Accrued compensation and related expenses                                                                                                                                   |  |              | 1,803  |   |      |   | 2,114  |  
|Accrued royalties                                                                                                                                                           |  |              | 530    |   |      |   | 512    |  
|Other accrued liabilities                                                                                                                                                   |  |              | 943    |   |      |   | 1,423  |  
|                                                                                                                                                                            |  |              |        |   |      |   |        |  
|Total current liabilities                                                                                                                                                   |  |              | 6,208  |   |      |   | 5,974  |  
|                                                                                                                                                                            |  |              |        |   |      |   |        |  
|Long-term debt                                                                                                                                                              |  |              | 5,818  |   |      |   |       |  
|Deferred income taxes                                                                                                                                                       |  |              |       |   |      |   | 427    |  
|Commitments and contingencies                                                                                                                                               |  |              |        |   |      |   |        |  
|Stockholders equity:                                                                                                                                                       |  |              |        |   |      |   |        |  
|Preferred stock, par value $.01 per share: Authorized shares  5,000,000; issued and outstanding shares  none                                                              |  |              |       |   |      |   |       |  
|Common stock, par value $.01 per share: Authorized shares  50,000,000; issued and outstanding shares  17,932,464 at December 31,
2002 and 18,541,462 at December 31, 2003 |  |              | 179    |   |      |   | 186    |  
|Additional paid-in-capital                                                                                                                                                  |  |              | 64,855 |   |      |   | 69,940 |  
|Deferred compensation                                                                                                                                                       |  |              |       |   |      |   | (825   | )
|Retained earnings                                                                                                                                                           |  |              | 3,291  |   |      |   | 18,225 |  
|                                                                                                                                                                            |  |              |        |   |      |   |        |  
|                                                                                                                                                                            |  |              | 68,325 |   |      |   | 87,526 |  
|                                                                                                                                                                            |  |             
|Less treasury stock, at cost  605,000 shares at December 31, 2002 and December 31, 2003.                                                                                   |  |              | (3,109 | ) |      |   | (3,109 | )
|                                                                                                                                                                            |  |              |        |   |      |   |        |  
|Total stockholders equity                                                                                                                                                  |  |              | 65,216 |   |      |   | 84,417 |  
|                                                                                                                                                                            |  |              |        |   |      |   |        |  
|Total liabilities and stockholders equity                                                                                                                                  |  | $            | 77,242 |   |      | $ | 90,818 |  
|                                                                                                                                                                            |  |              |        |   |      |   |        |  



See accompanying notes.



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I
NTERPORE INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF INCOME



(in
thousands, except per share data)



|                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                     |  | Year ended December 31, |       
|                                     |  | 2001                    |        |   | 2002 |   |        | 2003 | 
|Net product sales                    |  | $                       | 51,296 |   |      | $ | 58,923 |      |  | $ | 67,506 |  
|Royalty income                       |  |                         |       |   |      |   |       |      |  |   | 3,212  |  
|                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Net revenues                         |  |                         | 51,296 |   |      |   | 58,923 |      |  |   | 70,718 |  
|                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Cost of goods sold                   |  |                         | 14,355 |   |      |   | 16,444 |      |  |   | 20,249 |  
|                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Gross profit                         |  |                         | 36,941 |   |      |   | 42,479 |      |  |   | 50,469 |  
|                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Operating expenses:                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Research and development             |  |                         | 6,745  |   |      |   | 7,845  |      |  |   | 8,353  |  
|Selling and marketing                |  |                         | 18,657 |   |      |   | 24,020 |      |  |   | 27,649 |  
|General and administrative           |  |                         | 5,624  |   |      |   | 7,328  |      |  |   | 7,219  |  
|                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Total operating expenses             |  |                         | 31,026 |   |      |   | 39,193 |      |  |   | 43,221 |  
|                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Income from operations               |  |                         | 5,915  |   |      |   | 3,286  |      |  |   | 7,248  |  
|                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Interest income                      |  |                         | 479    |   |      |   | 40     |      |  |   | 153    |  
|Interest expense                     |  |                         | (15    | ) |      |   | (49    | )    |  |   | (25    | )
|Legal settlement                     |  |                         |       |   |      |   |       |      |  |   | 15,000 |  
|Other income                         |  |                         | 546    |   |      |   | 677    |      |  |   | 959    |  
|                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Total interest and other income, net |  |                         | 1,010  |   |      |   | 668    |      |  |   | 16,087 |  
|                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Income before taxes                  |  |                         | 6,925  |   |      |   | 3,954  |      |  |   | 23,335 |  
|Income tax provision (benefit)       |  |                         | 2,667  |   |      |   | (190   | )    |  |   | 8,401  |  
|                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income                           |  | $                       | 4,258  |   |      | $ | 4,144  |      |  | $ | 14,934 |  
|                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income per share:                |  |                         |        |   |      |   |        |      |  |   |        |  
|Basic                                |  | $                       | .27    |   |      | $ | .24    |      |  | $ | .85    |  
|Diluted                              |  | $                       | .27    |   |      | $ | .23    |      |  | $ | .79    |  
|Weighted average shares:             |  |                         |        |   |      |   |        |      |  |   |        |  
|Basic                                |  |                         | 15,544 |   |      |   | 17,238 |      |  |   | 17,642 |  
|Diluted                              |  |                         | 15,985 |   |      |   | 17,920 |      |  |   | 18,785 |  



See accompanying notes.



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



(in thousands)



|                                                             |  |                 |  |              |   |                          |        |                      |   |     |                  |   |        |               |   |      |                            |  |   |        |   |  |   |        |   |  |   |       
|------------------------------------------------------------ |  | --------------- |  | ------------ | - | ------------------------ | ------ | -------------------- | - | --- | ---------------- | - | ------ | ------------- | - | ---- | -------------------------- |  | - | ------ | - |  | - | ------ | - |  | - | ------
|                                                             |  | Preferred Stock |  | Common Stock |   | AdditionalPaid-InCapital |        | DeferredCompensation |   |     | RetainedEarnings |   |        | TreasuryStock |   |      | Total Stockholders Equity
|                                                             |  | Shares          |  | Amount       |   | Shares                   |        | Amount               |   |     |                  |   |       
|Balance at December 31, 2000                                 |  |                |  | $            |  |                          | 15,026 |                      | $ | 150 |                  | $ | 49,928 |               | $ |     |                            |  | $ | (5,111 | ) |  | $ | (3,109 | ) |  | $ | 41,858
|Net income and comprehensive income                          |  |                |  |              |  |                          |       |                      |   |    |                  |   |       |               |   |     |                            |  |   | 4,258  |   |  |   |       |   |  |   | 4,258 
|Exercise of stock options                                    |  |                |  |              |  |                          | 87     |                      |   | 1   |                  |   | 197    |               |   |     |                            |  |   |       |   |  |   |       |   |  |   | 198   
|Stock-based compensation expense                             |  |                |  |              |  |                          |       |                      |   |    |                  |   | 161    |               |   |     |                            |  |   |       |   |  |   |       |   |  |   | 161   
|Issuances under employee stock purchase plan                 |  |                |  |              |  |                          | 31     |                      |   |    |                  |   | 98     |               |   |     |                            |  |   |       |   |  |   |       |   |  |   | 98    
|Tax benefit from exercise of stock options                   |  |                |  |              |  |                          |       |                      |   |    |                  |   | 69     |               |   |     |                            |  |   |       |   |  |   |       |   |  |   | 69    
|Shares issued in purchase of American OsteoMedix Corporation |  |                |  |              |  |                          | 2,400  |                      |   | 24  |                  |   | 12,264 |               |   |     |                            |  |   |       |   |  |   |       |   |  |   | 12,288
|                                                             |  |                 |  |              |   |                          |        |                      |   |     |                  |   |        |               |   |      |                            |  |   |        |   |  |   |        |   |  |   |       
|Balance at December 31, 2001                                 |  |                |  |              |  |                          | 17,544 |                      |   | 175 |                  |   | 62,717 |               |   |     |                            |  |   | (853   | ) |  |   | (3,109 | ) |  |   | 58,930
|Net income and comprehensive income                          |  |                |  |              |  |                          |       |                      |   |    |                  |   |       |               |   |     |                            |  |   | 4,144  |   |  |   |       |   |  |   | 4,144 
|Exercise of stock options                                    |  |                |  |              |  |                          | 366    |                      |   | 4   |                  |   | 1,038  |               |   |     |                            |  |   |       |   |  |   |       |   |  |   | 1,042 
|Stock-based compensation expense                             |  |                |  |              |  |                          |       |                      |   |    |                  |   | 182    |               |   |     |                            |  |   |       |   |  |   |       |   |  |   | 182   
|Tax benefit from exercise of stock options                   |  |                |  |              |  |                          |       |                      |   |    |                  |   | 791    |               |   |     |                            |  |   |       |   |  |   |       |   |  |   | 791   
|Issuances under employee stock purchase plan                 |  |                |  |              |  |                          | 22     |                      |   |    |                  |   | 127    |               |   |     |                            |  |   |       |   |  |   |       |   |  |   | 127   
|                                                             |  |                 |  |              |   |                          |        |                      |   |     |                  |   |        |               |   |      |                            |  |   |        |   |  |   |        |   |  |   |       
|Balance at December 31, 2002                                 |  |                |  |              |  |                          | 17,932 |                      |   | 179 |                  |   | 64,855 |               |   |     |                            |  |   | 3,291  |   |  |   | (3,109 | ) |  |   | 65,216
|Net income and comprehensive income                          |  |                |  |              |  |                          |       |                      |   |    |                  |   |       |               |   |     |                            |  |   | 14,934 |   |  |   |       |   |  |   | 14,934
|Exercise of stock options and warrants                       |  |                |  |              |  |                          | 465    |                      |   | 5   |                  |   | 2,662  |               |   |     |                            |  |   |       |   |  |   |       |   |  |   | 2,667 
|Issuance of restricted stock                                 |  |                |  |              |  |                          | 110    |                      |   | 1   |                  |   | 965    |               |   | (966 | )                          |  |   |       |   |  |   |       |   |  |   |      
|Stock-based compensation expense                             |  |                |  |              |  |                          |       |                      |   |    |                  |   | 282    |               |   | 141  |                            |  |   |       |   |  |   |       |   |  |   | 423   
|Tax benefit from exercise of stock options                   |  |                |  |              |  |                          |       |                      |   |    |                  |   | 957    |               |   |     |                            |  |   |       |   |  |   |       |   |  |   | 957   
|Issuances under employee stock purchase plan                 |  |                |  |              |  |                          | 34     |                      |   | 1   |                  |   | 219    |               |   |     |                            |  |   |       |   |  |   |       |   |  |   | 220   
|                                                             |  |                 |  |              |   |                          |        |                      |   |     |                  |   |        |               |   |      |                            |  |   |        |   |  |   |        |   |  |   |       
|Balance at December 31, 2003                                 |  |                |  | $            |  |                          | 18,541 |                      | $ | 186 |                  | $ | 69,940 |               | $ | (825 | )                          |  | $ | 18,225 |   |  | $ | (3,109 | ) |  | $ | 84,417
|                                                             |  |                 |  |              |   |                          |        |                      |   |     |                  |   |        |               |   |      |                            |  |   |        |   |  |   |        |   |  |   |       



See accompanying notes.





F-5



---

##### Table of Contents

I
NTERPORE INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



(in
thousands)



|                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                            |  | Year ended December 31, |        
|                                                                                            |  | 2001                    |         |   | 2002 |   |         | 2003 | 
|Cash flows from operating activities:                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                  |  | $                       | 4,258   |   |      | $ | 4,144   |      |  | $ | 14,934  |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                         |         |   |      |   |         |      |  |   |         |  
|Depreciation                                                                                |  |                         | 852     |   |      |   | 1,153   |      |  |   | 1,248   |  
|Amortization                                                                                |  |                         | 225     |   |      |   | 291     |      |  |   | 321     |  
|Provision for doubtful accounts                                                             |  |                         | 325     |   |      |   | 156     |      |  |   | (69     | )
|Provision for excess and obsolete inventory                                                 |  |                         | 1,441   |   |      |   | 939     |      |  |   | 1,942   |  
|Stock-based compensation expense                                                            |  |                         | 161     |   |      |   | 182     |      |  |   | 423     |  
|Tax benefit from exercise of stock options                                                  |  |                         | 69      |   |      |   | 791     |      |  |   | 957     |  
|Changes in operating assets and liabilities:                                                |  |                         |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                                         |  |                         | (3,410  | ) |      |   | 775     |      |  |   | (1,024  | )
|Inventories                                                                                 |  |                         | (4,922  | ) |      |   | (16,455 | )    |  |   | (2,929  | )
|Prepaid expenses                                                                            |  |                         | 352     |   |      |   | (721    | )    |  |   | (904    | )
|Other assets                                                                                |  |                         | (88     | ) |      |   | 52      |      |  |   | 610     |  
|Income taxes receivable/payable                                                             |  |                         | 476     |   |      |   | (1,176  | )    |  |   | (677    | )
|Deferred income taxes                                                                       |  |                         | 700     |   |      |   | 33      |      |  |   | 1,211   |  
|Accounts payable and accrued liabilities                                                    |  |                         | 1,278   |   |      |   | 1,145   |      |  |   | (243    | )
|                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) operating activities                                         |  |                         | 1,717   |   |      |   | (8,691  | )    |  |   | 15,800  |  
|                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash paid for American OsteoMedix Corporation                                           |  |                         | (8,286  | ) |      |   | (89     | )    |  |   | (161    | )
|Capital expenditures                                                                        |  |                         | (1,594  | ) |      |   | (2,209  | )    |  |   | (685    | )
|Expenditures for patent and license rights                                                  |  |                         | (195    | ) |      |   | (726    | )    |  |   | (345    | )
|Maturities of short-term investments                                                        |  |                         |        |   |      |   |        |      |  |   | 2,495   |  
|Purchase of short-term investments                                                          |  |                         |        |   |      |   |        |      |  |   | (10,146 | )
|                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                       |  |                         | (10,075 | ) |      |   | (3,024  | )    |  |   | (8,842  | )
|                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Proceeds from (repayment of) long-term debt and capitalized lease obligations               |  |                         | (10     | ) |      |   | 5,818   |      |  |   | (5,818  | )
|Proceeds from exercise of stock options                                                     |  |                         | 198     |   |      |   | 1,042   |      |  |   | 2,667   |  
|Proceeds from employee stock purchase plan                                                  |  |                         | 98      |   |      |   | 127     |      |  |   | 220     |  
|                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) financing activities                                         |  |                         | 286     |   |      |   | 6,987   |      |  |   | (2,931  | )
|                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                        |  |                         | (8,072  | ) |      |   | (4,728  | )    |  |   | 4,027   |  
|Cash and cash equivalents at beginning of year                                              |  |                         | 14,610  |   |      |   | 6,538   |      |  |   | 1,810   |  
|                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                                    |  | $                       | 6,538   |   |      | $ | 1,810   |      |  | $ | 5,837   |  
|                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  



See accompanying notes.



F-6



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003



1. Summary of Significant
Accounting Policies



Organization and Description of Business



Interpore International, Inc. (Interpore)
operates in one business segment: the design, manufacture and marketing of medical devices for the orthopedic marketplace. Interpores products are distributed in the United States and internationally.



Basis of Presentation



The accompanying consolidated financial statements include the accounts of Interpore and its subsidiaries after elimination
of all significant intercompany transactions. Certain amounts in the consolidated financial statements have been reclassified to conform to the 2003 presentation.



Revenue Recognition



Revenue from sales of product where the customer immediately accepts title is recorded at the time of shipment. Revenue from sales of consigned inventory
is recorded upon receipt of written acknowledgement from sales agents or customers that the product has been used in a surgical procedure. Provision is made currently for estimated product returns based on historical experience and other known
factors.



Royalty income is recorded upon receipt of royalty
payments from third parties to which Interpore has granted licenses to certain of its spinal implant patents. These licenses provide for royalties calculated at a negotiated percentage of sales of specified spinal implant products by the third
parties.



Per Share Information



Basic earnings per share (EPS) is calculated by dividing net
earnings by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities, consisting of employee stock options, convertible securities and warrants. The following
table presents the computation of net income per share (in thousands, except per share data):



|                                                                                                                                      |  |                         |        |      |   |        |  |   |       
|------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                                                                                                                                      |  | Year ended December 31,
|                                                                                                                                      |  | 2001                    |        | 2002 |   | 2003  
|Net income                                                                                                                            |  | $                       | 4,258  |      | $ | 4,144  |  | $ | 14,934
|                                                                                                                                      |  |                         |        |      |   |        |  |   |       
|Shares used in computing net income per sharebasicWeighted average common shares outstanding                                         |  |                         | 15,544 |      |   | 17,238 |  |   | 17,642
|Effect of dilutive securities:                                                                                                        |  |                         |        |      |   |        |  |   |       
|Common share equivalents outstanding                                                                                                  |  |                         | 441    |      |   | 682    |  |   | 1,143 
|                                                                                                                                      |  |                         |        |      |   |        |  |   |       
|Shares used in computing net income per sharediluted                                                                                 |  |                         | 15,985 |      |   | 17,920 |  |   | 18,785
|                                                                                                                                      |  |                         |        |      |   |        |  |   |       
|Basic earnings per share                                                                                                              |  | $                       | .27    |      | $ | .24    |  | $ | .85   
|Diluted earnings per share                                                                                                            |  | $                       | .27    |      | $ | .23    |  | $ | .79   
|                                                                                                                                      |  |                         |       
|Stock options excluded from the diluted earnings per share calculation because their assumed conversion would have been
anti-dilutive |  |                         | 1,021  |      |   | 521    |  |   | 34    



F-7



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Concentrations of Business and Credit Risk



Interpore operates in worldwide markets which are subject to rapid technological advancement and significant government
regulation. The introduction of technologically advanced products by competitors and increased regulatory or trade barriers could have a material impact on the future operations of Interpore.



In the normal course of business, Interpore provides unsecured credit to its
customers. At December 31, 2003, 64% of Interpores accounts receivable are from domestic customers and 36% are from foreign customers. Interpore performs ongoing credit evaluations of its customers and maintains allowances for potential credit
losses which, when realized, have been within the range of managements expectations. Sales to domestic customers were 78%, 82% and 80% of net product sales in 2001, 2002 and 2003, respectively, and sales to foreign customers were 22%, 18% and
20% of net product sales in 2001, 2002 and 2003, respectively. All sales to foreign customers for the periods presented were denominated in United States dollars.



In the U.S., there are no significant customer concentrations, as Interpore invoices hospitals directly for product used or
shipped and no one hospital is significant. However, in the international markets, Interpore has three significant distributors that on a combined basis accounted for approximately 51% of its 2003 international net product sales and 10% of its 2003
worldwide net product sales.



Interpore evaluates the
collectibility of accounts receivable based on a combination of factors. In cases where Interpore becomes aware of circumstances that may impair a specific customers ability to meet its financial obligations subsequent to the original sales,
Interpore will record a specific allowance against amounts due, and thereby reduce the net recognized receivable to the amount that Interpore reasonably believes will be collected. For all other customers, Interpore recognizes allowances for
doubtful accounts based on the length of time the receivables are past due, the current business environment and Interpores historical experience.



Stock Option Plans



Interpore accounts for stock compensation to employees using the intrinsic value method provided for by Accounting Principles Board Opinion No. 25
(APB 25), Accounting for Stock Issuedto Employees and related interpretations. Interpore applies APB 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative
fair value accounting provided for under Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing
employee stock options.



Pro forma information regarding net
income and earnings per share is required by SFAS 123, and has been determined as if Interpore had accounted for employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted average assumptions: a risk-free interest rate of 5% in 2001, 3% in 2002 and 2003, a volatility factor of the expected market price of Interpore common stock of .69 in 2001,
..73 in 2002 and .61 in 2003, a weighted-average expected life of the options of six years, and no dividend yield.



F-8



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table illustrates the effect on net income per share, had compensation expense for the
employee stock-based plans been recorded based on the fair value method under SFAS 123 (in thousands, except per share data):



|                                                                                                                             |  |                         |       |      |   |       |  |   |       
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | ------
|                                                                                                                             |  | Year Ended December 31,
|                                                                                                                             |  | 2001                    |       | 2002 |   | 2003 
|Net income, as reported                                                                                                      |  | $                       | 4,258 |      | $ | 4,144 |  | $ | 14,934
|Deduct: total stock based employee compensation expense determined under fair value based method, net of related tax effects |  |                         | 1,108 |      |   | 1,567 |  |   | 1,401 
|                                                                                                                             |  |                         |       |      |   |       |  |   |       
|Net income, as adjusted                                                                                                      |  | $                       | 3,150 |      | $ | 2,577 |  | $ | 13,533
|                                                                                                                             |  |                         |       |      |   |       |  |   |       
|Basic net income per share:                                                                                                  |  |                         |       |      |   |       |  |   |       
|As reported                                                                                                                  |  | $                       | .27   |      | $ | .24   |  | $ | .85   
|As adjusted                                                                                                                  |  | $                       | .20   |      | $ | .15   |  | $ | .77   
|Diluted net income per share:                                                                                                |  |                         |       |      |   |       |  |   |       
|As reported                                                                                                                  |  | $                       | .27   |      | $ | .23   |  | $ | .79   
|As adjusted                                                                                                                  |  | $                       | .20   |      | $ | .14   |  | $ | .72   



Advertising



Interpore expenses as incurred the costs of advertising which totaled
$479,000, $163,000 and $501,000 for the years ended December 31, 2001, 2002 and 2003, respectively.



Research and Development



Expenditures for research and development are expensed as incurred.



Cash, Cash Equivalents and Short-term Investments



Highly liquid investments with a maturity of three months or less at the date of purchase are classified as cash equivalents. Investments with a maturity of more than three months but less than on year at the date of purchase are classified
as short-term investments. At December 31, 2003, short-term investments include held-to-maturity investments and consisted of certificates of deposits of $2.6 million, corporate bonds of $2.6 million and $2.5 million in municipal bonds. Debt
securities are classified as held-to-maturity when Interpore has the intent and ability to hold the securities to maturity. Held-to-maturity investments are stated at cost, adjusted for amortization of premiums and discounts to maturity. Unrealized
gains (losses) were not significant for the year ended December 31, 2003.



Inventories



Inventories are stated at the
lower of first-in, first-out average cost or market. Inventories are comprised of the following (in thousands):



|                |  |              |        |      |   |       
|--------------- |  | ------------ | ------ | ---- | - | ------
|                |  | December 31,
|                |  | 2002         |        | 2003
|Raw material    |  | $            | 4,655  |      | $ | 3,878 
|Work-in-process |  |              | 874    |      |   | 970   
|Finished goods  |  |              | 26,466 |      |   | 28,134
|                |  |              |        |      |   |       
|                |  | $            | 31,995 |      | $ | 32,982
|                |  |              |        |      |   |       



Shipping Costs



Shipping costs are included in cost of sales.



F-9



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Long-Lived Assets



In August 2001, the Financial Accounting Standards Board issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No.
144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and other related accounting guidance. Interpore adopted the statement on January 1, 2002 and believes no impairment of
the carrying value of its long-lived assets existed upon adoption or at December 31, 2002 and December 31, 2003.



Property, Plant and Equipment



Property, plant and equipment are stated at cost and are comprised of the following (in thousands):



|                                               |  |              |        |   |      |   |        |  
|---------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                               |  | December 31, |       
|                                               |  | 2002         |        |   | 2003 |  
|Machinery and equipment                        |  | $            | 7,628  |   |      | $ | 8,072  |  
|Furniture and fixtures                         |  |              | 1,042  |   |      |   | 1,183  |  
|Leasehold improvements                         |  |              | 821    |   |      |   | 921    |  
|                                               |  |              |        |   |      |   |        |  
|Property, plant and equipment, at cost         |  |              | 9,491  |   |      |   | 10,176 |  
|Less accumulated depreciation and amortization |  |              | (6,081 | ) |      |   | (7,329 | )
|                                               |  |              |        |   |      |   |        |  
|Property, plant and equipment, net             |  | $            | 3,410  |   |      | $ | 2,847  |  
|                                               |  |              |        |   |      |   |        |  



Depreciation is
provided using the straight-line method over the following estimated useful lives:



|                        |  |                                                 
|----------------------- |  | ------------------------------------------------
|Machinery and equipment |  | 3 to 5 years                                    
|Furniture and fixtures  |  | 3 to 5 years                                    
|Leasehold improvements  |  | Lesser of estimated useful life or term of lease



Goodwill



In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations(SFAS 141) and No. 142, Goodwill and Other Intangible Assets(SFAS 142). SFAS 141 addresses financial accounting and reporting for business combinations and requires all business
combinations to be accounted for using the purchase method. SFAS 142 addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Goodwill and other intangible assets with indefinite
lives are no longer amortized, but instead subject to impairment tests at least annually. The impairment test is comprised of two parts. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the
carrying amount exceeds the fair value of a reporting unit, the second step of the goodwill impairment test must be performed. The second step compares the implied fair value of the reporting units goodwill with the respective carrying amount
in order to determine the amount of impairment loss, if any. In July 2001, upon the acquisition of American OsteoMedix Corporation (AOM), Interpore early adopted SFAS 141 and SFAS 142. In connection with the acquisition, approximately
$20 million of the purchase price was allocated to goodwill. Prior to July 2001, Interpore had no goodwill or other intangible assets with indefinite lives. In accordance with SFAS 142, Interpore performed the first part of the two-step goodwill
impairment test and determined that the fair value exceeded the carrying amount as of January 1, 2002. As a result, the second step of the impairment test was not required. Interpore performed the annual impairment test during the quarters ended
September 30, 2002 and September 30, 2003 and determined that there was no impairment of goodwill. Interpore intends to perform its annual impairment test of goodwill during the respective third quarter of subsequent years, or more frequently if
Interpore believes indicators of impairment exist.



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Other Intangible Assets



Other intangible assets include patents and license rights. The patents and license rights are amortized on a straight-line
basis over their estimated useful lives. Amortization begins at the time the patents are issued. Management periodically evaluates the recoverability of intangible assets based on undiscounted future cash flows. Amortization expense for the years
ended December 31, 2001, 2002 and 2003 was $225,000, $291,000 and $321,000, respectively. At December 31, 2003, the amortization expense of the remaining balance of other intangible assets of $2,572,000 for each of the years ended December 31, 2004,
2005, 2006, 2007, and 2008 will be $319,000, $319,000, $317,000, $256,000 and $255,000, respectively. Accumulated amortization of other intangible assets was $962,000 and $1,283,000 at December 31, 2002 and 2003, respectively.



Income Taxes



Interpore uses the liability method of accounting for income taxes as set forth in Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. Under this method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. Deferred tax assets are recognized and measured based on the likelihood of realization of the related tax benefit in the future.



Consolidated Statements of Cash Flows



Interpore paid income taxes of $1,408,000, $162,000 and $6,423,000 and interest of $15,000, $49,000 and $25,000 in 2001, 2002 and 2003, respectively.



Use of Estimates



The preparation of these financial statements requires the use of estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, estimates, including those related to product returns, bad debts, inventories, intangible assets and income taxes, are evaluated.
Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



Recent Accounting Pronouncements



In January 2003 the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46). FIN 46 requires the primary beneficiary of a variable interest entity (VIE) to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. For arrangements
entered into with VIEs created prior to January 31, 2003, the provisions of FIN 46 were required to be adopted at the end of periods ending after December 15, 2003. Interpore reviewed its investments and other arrangements and determined none of its
investee companies were VIEs. The provisions of FIN 46 were effective immediately for all arrangements entered into with new VIEs created after January 31, 2003. Interpore has not invested in any VIEs after January 31, 2003.



F-11



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



2. Acquisition of American OsteoMedix Corporation



On July 10, 2001, Interpore completed the acquisition of AOM, a developer,
manufacturer and marketer of unique minimally invasive surgery products which facilitate the delivery of materials into bone through small incisions, a procedure referred to as osteoplasty. The initial transaction value was $21 million, including
approximately $8 million in cash, approximately 2.4 million shares of Interpore common stock valued at $12 million and transaction costs of approximately $500,000. In addition to the initial consideration, the agreement provides for contingent cash
consideration of up to $5 million based upon sales of AOM products through 2005. Through December 31, 2003, total contingent cash consideration paid was $250,000. The transaction has been accounted for using the purchase method of accounting.
Results of operations of AOM are included in Interpores consolidated results of operations beginning on July 10, 2001. Approximately $20 million of the purchase price was allocated to goodwill and future contingent cash consideration will also
be allocated to goodwill. The remaining purchase price was assigned to accounts receivable of $430,000, inventory of $513,000, prepaid expenses of $24,000, property, plant and equipment of $103,000 and current liabilities of $513,000.



3. Fair Value of Financial Instruments



Interpores financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, payables and borrowings. Interpore believes all of the financial instruments recorded values approximate current values because of the short maturities of these instruments.



4. Long-Term Obligations



Interpore has available a $10 million line of credit facility with its
primary bank. The line is secured by substantially all of the assets of Interpore, bears interest at the banks prime rate (4.0% at December 31, 2003) minus .75%. Interpore may also borrow under the line at a rate of the banks LIBOR rate
plus 1.75%. The line matures in June 2005. The facility contains certain financial covenants with which Interpore was in compliance at December 31, 2003. There were no amounts outstanding under the facility at December 31, 2003.



5. Stockholders Equity



Stock Options



Interpore has eight stock option plans that provide for the granting of incentive stock options or non-qualified stock
options to officers, key employees, directors and consultants. The 1995 Stock Option Plan (the 1995 Plan), the Stock Option Plan for Non-Employee Directors (the Directors Plan), the 1999 Consultants Stock Option Plan (the
Consultants Plan), the 2000 Equity Participation Plan (the 2000 Plan) and the 2003 Equity Plan (the 2003 Plan) are the only plans with stock option awards available for grant. The other three plans have either
expired or have been terminated with respect to future option grants, but have options outstanding and exercisable at December 31, 2003. Options outstanding under Interpores eight stock option plans generally vest over a four- or five-year
period, and generally expire either six years or ten years from the date of grant.



Interpore also complies with the provisions of the Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services, with respect to stock option grants to non-employees who are consultants for Interpore. EITF 96-18 requires variable plan accounting with respect to such non-employee stock options, whereby compensation
associated with such options is measured on the date such options vest, and incorporates the then-current fair market value of Interpores common stock into the option valuation model.



F-12



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At December 31, 2003, there were 1,863 shares available for grant under the 1995 Plan. The Directors
Plan provides for a maximum of 300,000 shares to be issued pursuant to options granted under the plan. At December 31, 2003, there were approximately 110,500 shares available for grant under the Directors Plan. The Consultants Plan provides for a
maximum of 300,000 shares to be issued pursuant to options granted under the plan and 250,000 shares were available for grant at December 31, 2003. The 2000 Plan provides for a maximum of 1.0 million shares to be issued pursuant to options granted
under the plan and 312,250 shares were available for grant at December 31, 2003. The 2003 Plan provides for a maximum of 400,000 shares to be issued pursuant to options granted under the plan and 260,500 shares were available for grant at December
31, 2003.



The following is a summary of stock option activity
and weighted average exercise price per share for periods indicated:



|                                                                   |  |           |   |  |                                |     
|------------------------------------------------------------------ |  | --------- | - |  | ------------------------------ | ----
|                                                                   |  | Shares    |   |  | Weighted Average ExercisePrice
|Outstanding at December 31, 2000                                   |  | 2,419,193 |   |  | $                              | 5.80
|Granted                                                            |  | 493,650   |   |  |                                | 4.46
|Exercised                                                          |  | (109,960  | ) |  |                                | 3.80
|Forfeited and expired                                              |  | (153,040  | ) |  |                                | 6.39
|                                                                   |  |           |   |  |                                |     
|Outstanding at December 31, 2001                                   |  | 2,649,843 |   |  |                                | 5.60
|Granted                                                            |  | 456,750   |   |  |                                | 8.24
|Exercised                                                          |  | (397,361  | ) |  |                                | 3.31
|Forfeited and expired                                              |  | (83,363   | ) |  |                                | 6.02
|                                                                   |  |           |   |  |                                |     
|Outstanding at December 31, 2002                                   |  | 2,625,869 |   |  |                                | 6.40
|Granted                                                            |  | 249,500   |   |  |                                | 9.23
|Exercised                                                          |  | (461,749  | ) |  |                                | 5.98
|Forfeited and expired                                              |  | (192,813  | ) |  |                                | 6.63
|                                                                   |  |           |   |  |                                |     
|Outstanding at December 31, 2003                                   |  | 2,220,807 |   |  |                                | 6.78
|                                                                   |  |           |   |  |                                |     
|Options exercisable at:                                            |  |           |   |  |                                |     
|December 31, 2001                                                  |  | 1,665,393 |   |  | $                              | 5.67
|December 31, 2002                                                  |  | 1,594,386 |   |  |                                | 6.22
|December 31, 2003                                                  |  | 1,385,603 |   |  |                                | 6.31
|Estimated fair value per share of options granted during the year: |  |           |   |  |                                |     
|2001                                                               |  |           |   |  | $                              | 5.63
|2002                                                               |  |           |   |  |                                | 5.45
|2003                                                               |  |           |   |  |                                | 5.94



The weighted average
remaining contractual life of stock options outstanding at December 31, 2001, 2002 and 2003 were approximately 5.2, 5.4 and 5.6 years, respectively.



F-13



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Summary information about stock options outstanding at December 31, 2003 follows:



|                        |  |                                  |  |                                                     |  |                                |      |        |           |                                 |   |     
|----------------------- |  | -------------------------------- |  | --------------------------------------------------- |  | ------------------------------ | ---- | ------ | --------- | ------------------------------- | - | ----
|                        |  | Outstanding at December 31, 2003 |  | Exercisable at December 31, 2003                   
|Range of Exercise Price |  | Shares                           |  | Weighted AverageRemainingContractualLife (in Years) |  | Weighted AverageExercise Price |      | Shares |           | Weighted Average Exercise Price
|$3.00 - $ 4.00          |  | 279,579                          |  | 6.5                                                 |  | $                              | 3.91 |        | 133,229   |                                 | $ | 3.87
|$4.01 - $ 5.00          |  | 357,553                          |  | 4.7                                                 |  |                                | 4.71 |        | 335,803   |                                 |   | 4.73
|$5.01 - $ 6.00          |  | 311,500                          |  | 3.5                                                 |  |                                | 5.39 |        | 271,334   |                                 |   | 5.38
|$6.01 - $ 7.00          |  | 56,500                           |  | 7.9                                                 |  |                                | 6.57 |        | 23,000    |                                 |   | 6.65
|$7.01 - $ 8.00          |  | 568,000                          |  | 4.0                                                 |  |                                | 7.76 |        | 437,250   |                                 |   | 7.79
|$8.01 - $ 9.00          |  | 420,425                          |  | 7.3                                                 |  |                                | 8.44 |        | 165,612   |                                 |   | 8.60
|$9.01- $18.81           |  | 227,250                          |  | 9.1                                                 |  |                                | 9.96 |        | 19,375    |                                 |   | 9.84
|                        |  |                                  |  |                                                     |  |                                |      |        |           |                                 |   |     
|$3.00 -$18.81           |  | 2,220,807                        |  | 5.6                                                 |  |                                | 6.78 |        | 1,385,603 |                                 |   | 6.31
|                        |  |                                  |  |                                                     |  |                                |      |        |           |                                 |   |     



Employee Stock Purchase Plan



Interpore has a qualified employee stock purchase plan
which allows employees to purchase shares of Interpore common stock every six months through payroll deductions. The purchase price for the shares is 85% of the lesser of the fair market value of such shares on the first or last day of each
six-month period. The plan provides for a maximum of 300,000 shares to be issued pursuant to the plan. As of December 31, 2003,194,003 shares of common stock had been issued pursuant to the plan.



Warrants and Non-Plan Stock Options



In connection with the acquisition of all the assets of Quantic Biomedical,
Inc. in 1999, Interpore issued warrants to purchase 200,000 shares of Interpore common stock to Quantic and warrants to purchase 175,000 shares are outstanding at December 31, 2003. The warrants were issued at a weighted average exercise price of
$7.875 per share, are currently exercisable, and expire on various dates beginning June 2005 and ending December 2006.



In 2001, Interpore issued non-qualified stock options outside of its formal stock option plans to two entities as compensation for consulting services.
One such option, for 60,000 shares of Interpore common stock, was issued at an exercise price of $5.24 per share, is currently exercisable as to 20,000 shares, and expires on July 10, 2006. The other option, for 10,000 shares, was issued at an
exercise price of $8.39 per share, is currently exercisable, and expires on November 1, 2004.



Restricted Stock Grants



On May 16, 2003, Interpore issued restricted stock grants totaling 110,000 shares to certain executive employees, which shares vest over four years. The stock grants were valued at $966,000 and recorded in stockholders equity as
deferred compensation which is being amortized to compensation expense over the vesting period.



F-14



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Stockholder Rights Plan



Under Interpores Stockholder Rights Plan, every share of Interpore common stock currently issued or to be issued is
accompanied by one right, and every common share issued upon conversion of Interpore preferred stock also will be accompanied by one right. The plan provides for the rights to become exercisable upon the earlier to occur of (i) ten days following
the announcement that a person or group of persons has acquired or obtained the right to acquire 15% or more of Interpore common stock, or (ii) ten days following the announcement or commencement of a tender offer which would result in ownership of
15% or more of the common stock.



If any person or group of
persons acquires 15% or more of Interpore common stock, each right, once exercisable and excluding any rights acquired by the 15% holder, will entitle its holder to purchase that number of additional shares of Interpore common stock having a market
value of twice the rights exercise price. If Interpore is involved in a merger or other business combination involving the exchange of Interpore common stock for stock of an acquiring company at any time after the rights become exercisable,
each right will entitle its holder to purchase that number of the acquiring companys common stock having a market value of twice the rights exercise price.



The rights current exercise price is $33.00. The exercise price and the number of shares issuable upon exercise are
subject to adjustment from time to time to prevent dilution. The rights will expire on November 17, 2007, subject to Interpores right to extend such date, unless earlier redeemed or exchanged by Interpore or terminated. Interpore is entitled
to redeem the rights at one cent per right at any time before they become exercisable.



6. Employee Benefit Plan



Interpore has a
401(k) retirement savings plan available to all employees beginning 30 days after an employees date of hire. Employees may contribute up to 20% of their salary, subject to the maximum contribution allowed by the Internal Revenue Service. In
addition to employee contributions, the plan has an employer matching provision pursuant to which Interpore contributes 50% of the first 4% of salary contributed by the employee. Employee contributions are always 100% vested. Vesting in employer
matching contributions is phased in over the first three years of an employees service; employees with three years of service or more are 100% vested. During the years ended December 31, 2001, 2002 and 2003, Interpore contributed approximately
$141,000, $154,000 and $178,000, respectively, to the plan.



7. Income Taxes



A reconciliation of the income tax provision (benefit)
using the federal statutory rate to the book provision for income taxes follows (in thousands):



|                                               |  |                         |       |      |   |        |      |  |   |       |  
|---------------------------------------------- |  | ----------------------- | ----- | ---- | - | ------ | ---- |  | - | ----- | -
|                                               |  | Year Ended December 31, |      
|                                               |  | 2001                    |       | 2002 |   |        | 2003 | 
|Statutory federal provision for income taxes   |  | $                       | 2,354 |      | $ | 1,342  |      |  | $ | 8,167 |  
|Increase (decrease) in taxes resulting from:   |  |                         |       |      |   |        |      |  |   |       |  
|State tax, net of federal benefit              |  |                         | 251   |      |   | 123    |      |  |   | 472   |  
|Research and development and other tax credits |  |                         |      |      |   | (1,120 | )    |  |   | (261  | )
|Reduction in valuation allowance               |  |                         |      |      |   | (513   | )    |  |   |      |  
|Permanent differences and other                |  |                         | 62    |      |   | (22    | )    |  |   | 23    |  
|                                               |  |                         |       |      |   |        |      |  |   |       |  
|Income tax provision (benefit)                 |  | $                       | 2,667 |      | $ | (190   | )    |  | $ | 8,401 |  
|                                               |  |                         |       |      |   |        |      |  |   |       |  



F-15



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Significant components of the income tax provision (benefit) are as follows (in thousands):



|                                     |  |                         |       |      |   |      |      |  |   |      
|------------------------------------ |  | ----------------------- | ----- | ---- | - | ---- | ---- |  | - | -----
|                                     |  | Year Ended December 31,
|                                     |  | 2001                    |       | 2002 |   |      | 2003
|Current expense:                     |  |                         |       |      |   |      |      |  |   |      
|Federal                              |  | $                       | 1,602 |      | $ | (384 | )    |  | $ | 6,884
|State                                |  |                         | 365   |      |   | 161  |      |  |   | 306  
|                                     |  |                         |       |      |   |      |      |  |   |      
|Total current                        |  |                         | 1,967 |      |   | (223 | )    |  |   | 7,190
|                                     |  |                         |       |      |   |      |      |  |   |      
|Deferred expense (benefit):          |  |                         |       |      |   |      |      |  |   |      
|Federal                              |  |                         | 684   |      |   | 449  |      |  |   | 790  
|State                                |  |                         | 16    |      |   | (416 | )    |  |   | 421  
|                                     |  |                         |       |      |   |      |      |  |   |      
|Total deferred                       |  |                         | 700   |      |   | 33   |      |  |   | 1,211
|                                     |  |                         |       |      |   |      |      |  |   |      
|Total income tax provision (benefit) |  | $                       | 2,667 |      | $ | (190 | )    |  | $ | 8,401
|                                     |  |                         |       |      |   |      |      |  |   |      



The income tax
provision (benefit) does not include benefits of $69,000, $791,000 and $957,000 for the years ended December 31, 2001, 2002, and 2003, respectively, related to the exercise of employee stock options recorded in additional paid-in capital.



The Tax Reform Act of 1986 includes provisions which
significantly limit the potential use of net operating losses and tax credit carryforwards in situations where there is a change in ownership, as defined, of more than 50% during a cumulative three-year period. Accordingly, if a change in ownership
occurs, the ultimate benefit realized from these carryforwards may be significantly reduced in total, and the amount that may be utilized in any given year may be significantly limited. California has enacted similar legislation.



Interpore has federal net operating loss carryforwards at December 31, 2003
of approximately $1.5 million resulting from the acquisition of Interpore Orthopaedics, Inc. (Orthopaedics). As a result of the acquisition, Orthopaedics experienced a more than 50% ownership change. Accordingly, under the
provisions of the 1986 Tax Reform Act, the use of Orthopaedics net operating loss carryforwards is limited to approximately $300,000 per year and these carryforwards expire in the year 2004.



Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax liabilities and assets as of December 31, 2003 are as
follows (in thousands):



|                                                                          |  |              |       |   |      |   |        |  
|------------------------------------------------------------------------- |  | ------------ | ----- | - | ---- | - | ------ | -
|                                                                          |  | December 31, |      
|                                                                          |  | 2002         |       |   | 2003 |  
|Deferred tax assets:                                                      |  |              |       |   |      |   |        |  
|Net operating loss carryforwards                                          |  | $            | 496   |   |      | $ | 105    |  
|Research and development and alternative minimum tax credit carryforwards |  |              | 653   |   |      |   |       |  
|Reserves and accruals not currently deductible for tax purposes           |  |              | 260   |   |      |   | 317    |  
|Inventory capitalization                                                  |  |              | 1,894 |   |      |   | 1,552  |  
|Stock-based compensation                                                  |  |              |      |   |      |   | 299    |  
|Capitalized research and development                                      |  |              | 602   |   |      |   | 533    |  
|                                                                          |  |              |       |   |      |   |        |  
|Net deferred tax assets                                                   |  |              | 3,905 |   |      |   | 2,806  |  
|                                                                          |  |              |       |   |      |   |        |  
|Deferred tax liabilities:                                                 |  |              |       |   |      |   |        |  
|Depreciation                                                              |  |              | (952  | ) |      |   | (1,064 | )
|                                                                          |  |              |       |   |      |   |        |  
|Total deferred tax liabilities                                            |  |              | (952  | ) |      |   | (1,064 | )
|                                                                          |  |              |       |   |      |   |        |  
|Net deferred tax asset                                                    |  | $            | 2,953 |   |      | $ | 1,742  |  
|                                                                          |  |              |       |   |      |   |        |  



F-16



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



It is Interpores policy to establish reserves for taxes that may become payable in future years
as a result of examinations by tax authorities. The tax reserves are analyzed periodically and adjustments are made as events occur to warrant adjustment to the reserve. During 2003, management reassessed their reserve for possible tax exposures
relating to prior years. As a result of this review, management recorded a tax benefit of $140,000 to reduce their reserve for possible tax exposures to $755,000 as of December 31, 2003.



8. Commitments and Contingencies



License Agreements



Interpore has agreements with surgeons, who assisted in the development of certain spine and orthobiologic products, under
which Interpore pays royalties ranging from 1% to 6% of net revenues generated from the sale of certain products. Royalty expense for the years ended December 31, 2001, 2002 and 2003 was $1,458,000, $1,848,000 and $1,848,000, respectively, and is
included in cost of goods sold on the accompanying consolidated statements of income.



Legal Settlement



On January 24, 2003,
Interpore entered into a settlement agreement in which it received $15 million. The $15 million settlement was recorded as a legal settlement in the quarter ended March 31, 2003.



Litigation



Cross Medical Products v. Medtronic Sofamor Danek



On May 1, 2003, our wholly owned subsidiary, Cross Medical Products, Inc. (Cross), filed an amended complaint in the United States District
Court for the Central District of California against Medtronic Sofamor Danek, Inc. and Medtronic Sofamor Danek USA, Inc. (collectively, Medtronic), which complaint alleges that Medtronic has infringed and continues to infringe
Cross U.S. Patent Nos. 5,466,237, 5,474,555 and 5,624,442. These patents relate to technology embodied in certain components of the SYNERGY Spinal System. The complaint seeks damages for willful past and continuing infringement of the patents.
The complaint also seeks a declaratory judgment against Medtronic that Cross is not infringing U.S. Patent Nos. 5,591,165, 4,641,636, 4,815,453 and 5,005,562. On June 23, 2003, Medtronic filed counterclaims for a declaratory judgment that it does
not infringe Cross patents, and that the patents are invalid and unenforceable.



On October 10, 2003, Medtronic filed a motion to amend its answer and counterclaims to add certain affirmative defenses and causes of action against Cross on behalf of Medtronic and SDGI Holdings, Inc.
(SDGI) for past and continued infringement of U.S. Patent Nos. 6,152,927 and 6,533,786 based on Cross C-TEK anterior cervical plate system.



On October 22, 2003, the Court, at the request of Cross, dismissed Cross claims for declaratory judgment that Cross is not infringing U.S. Patent
Nos. 5,591,165, 4,641,636, 4,815,453 and 5,005,562.



On
November 3, 2003, the Court granted Medtronics motion to amend its answer and counterclaims to allege causes of action against Cross on behalf of Medtronic and SDGI for past and continued infringement of U.S. Patent Nos. 6,152,927 and
6,533,786 based on Cross C-TEK anterior cervical plate system.



F-17



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On October 22, 2003, Cross, Interpore Cross International, Inc. (Interpore Cross), and
Interpore Orthopaedics, Inc. (Interpore Orthopaedics) filed an amended complaint in the United States District Court for the Central District of California against Medtronic and SDGI, which complaint alleges that Medtronic has infringed
and continues to infringe Cross U.S. Patent No. 6,224,602. That patent relates to technology embodied in certain components of the C-TEK anterior cervical plate system. The complaint seeks damages for willful past and continuing infringement
of the patent. The complaint also seeks a declaratory judgment against Medtronic and SDGI that Interpore Cross and Interpore Orthopaedics are not infringing U.S. Patent Nos. 6,152,927 and 6,533,786.



On March 1, 2004, the Court granted Medtronics motion for summary
judgment of the invalidity of Cross U.S. Patent No. 5,466,237, ruling that this patent was partially invalid. Cross is exploring strategies in response to this ruling and currently plans to challenge it. However, there can be no assurance that
Cross will be successful in any such challenge.



Interpore is
unable at this time to predict the outcome of this litigation.



Cross Medical Products v. Puno and Byrd



On
December 4, 2003, Drs. Puno and Byrd filed a motion to intervene in the Cross litigation with Medtronic claiming ownership of Cross U.S. Patent Nos. 5,466,237, 5,474,555, and 5,624,442 patents, as well as other of Cross patents not
at issue in this litigation, on the basis of a purported termination by them of certain royalty agreements with Cross. On December 10, 2003, Cross filed a demand for arbitration of the claims raised by Drs. Puno and Byrd with the American
Arbitration Association under the terms of the royalty agreements seeking a declaration that Drs. Puno and Byrd have no interest in any of Cross patents, and no interest in any of the settlement recovery received from the settlement of
Cross lawsuit with DePuy Spine, Inc. in January 2003. On January 5, 2004, Drs. Puno and Byrd filed a counterclaim in the arbitration claiming entitlement to Cross U.S. Patent Nos. 5,466,237, 5,474,555, 5,624,442, 5,496, 321, and
5,360,431 Patents, and at least $21,000,000 from Cross settlement with DePuy Spine. On January 26, 2004, Cross entered into an agreement with Drs. Puno and Byrd clarifying Cross ownership of all of its patents and the right of Drs. Puno
and Byrd to receive royalties on certain of Cross products. On January 29, 2004, Drs. Puno and Byrd withdrew their motion to intervene in the Medtronic litigation and the parties dismissed the arbitration. Separately, Cross entered into an
agreement with Drs. Puno and Byrd to prepay royalties remaining under the existing royalty agreements with respect to certain other Cross products in the amount of $2.5 million, and the parties agreed to terminate those royalty agreements.



Abrams v. Interpore International, Inc., et al



On March 8, 2004, one of Interpores alleged stockholders
filed a putative class action lawsuit in the Superior Court of the State of California, County of Orange, against Interpore and each member of its board of directors. The lawsuit, Abrams v. Interpore International, Inc., et al., (Case No.
04CC00093), alleges that Interpore and its directors breached the fiduciary duties of care, loyalty, candor, and independence owed to Interpores stockholders in connection with the proposed acquisition of Interpore by Biomet, Inc., (see Note
10). Specifically, the lawsuit alleges that Interpore and its directors failed to take steps to maximize the value of Interpore, took steps to avoid competitive bidding, gave Biomet an unfair advantage, failed to solicit other potential acquirors or
alternative transactions and failed to properly value Interpore. The plaintiff seeks to enjoin Interpore from proceeding with the proposed acquisition by Biomet. Additionally, the complaint seeks certification of a class, a declaration that
Interpore and its directors have breached their fiduciary duties in entering into the proposed transaction with Biomet, an injunction barring the proposed acquisition and directing Interpore to pursue a transaction in the best interests of its
stockholders, a constructive trust upon any benefits improperly received by Interpore or any of its directors as a result of the proposed acquisition, costs, and attorneys and experts fees. Interpore believes that this lawsuit is without
merit and intends to vigorously defend against the allegations in the complaint.



Aside from the aforementioned matters, the nature of Interpores business subjects it to product liability and various other legal proceedings from time to time. Interpore is currently involved in legal
proceedings incidental to the normal conduct of its business. It does not believe that any liabilities relating to the legal proceedings to which it is a party are likely to be, individually or in the aggregate, material to its consolidated
financial condition or results of operations.



At December 31,
2002 and 2003, accrued legal expenses were $130,000 and $434,000, respectively.



F-18



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



9. Lease Commitments



Future minimum rentals under noncancelable operating leases for manufacturing and office facilities and equipment at December 31, 2003 are as follows
(in thousands):



|           |  |   |      
|---------- |  | - | -----
|2004       |  | $ | 828  
|2005       |  |   | 823  
|2006       |  |   | 826  
|2007       |  |   | 841  
|2008       |  |   | 70   
|Thereafter |  |   |     
|           |  |   |      
|           |  | $ | 3,388
|           |  |   |      



Rent expense was
$759,000, $894,000 and $1.1 million in 2001, 2002 and 2003, respectively.



The lease for Interpores principal office and manufacturing facility, which expires January 31, 2008, provides a right to extend the lease for an additional five years at the fair market lease rate of the
facility on the extension date, but not less than the rate paid by Interpore during the month immediately preceding the commencement of the extension period.



10. Subsequent Event



On March 7, 2004, Interpore entered into a definitive agreement with Biomet, Inc. under which Biomet will acquire all of Interpores outstanding
common stock for cash in an amount equal to $14.50 per share, which represents a total equity value of approximately $280 million. Although the transaction is subject to regulatory approval, approval by Interpores stockholders and other
customary closing conditions, it is expected that the transaction will close in the second quarter of 2004.



11. Quarterly Results (unaudited)



The following table presents a summary of the quarterly results of operations for 2002 and 2003 (in thousands, except per share data):



|                             |  |         |        |     |        |   |        |  |        |        |  |   |       
|---------------------------- |  | ------- | ------ | --- | ------ | - | ------ |  | ------ | ------ |  | - | ------
|                             |  | Quarter
|                             |  | First   |        |     | Second |   | Third  |  | Fourth
|2002                         |  |         |        |     |        |   |        |  |        |        |  |   |       
|Net revenues                 |  | $       | 13,786 |     |        | $ | 14,663 |  | $      | 14,724 |  | $ | 15,750
|Gross profit                 |  |         | 10,074 |     |        |   | 10,538 |  |        | 10,447 |  |   | 11,420
|Net income                   |  |         | 645    |     |        |   | 651    |  |        | 1,384  |  |   | 1,464 
|Net income per sharebasic   |  | $       | .04    |     |        | $ | .04    |  | $      | .08    |  | $ | .08   
|Net income per sharediluted |  | $       | .04    |     |        | $ | .04    |  | $      | .08    |  | $ | .08   
|                             |  |         |        |    
|2003                         |  |         |        |     |        |   |        |  |        |        |  |   |       
|Net revenues                 |  | $       | 15,807 |     |        | $ | 18,382 |  | $      | 18,506 |  | $ | 18,023
|Gross profit                 |  |         | 11,331 |     |        |   | 13,184 |  |        | 13,336 |  |   | 12,618
|Net income                   |  |         | 10,023 | (1) |        |   | 2,380  |  |        | 1,681  |  |   | 850   
|Net income per sharebasic   |  | $       | .58    |     |        | $ | .14    |  | $      | .09    |  | $ | .05   
|Net income per sharediluted |  | $       | .56    |     |        | $ | .13    |  | $      | .09    |  | $ | .04   

---

|(1) | On January 24, 2003, Interpore entered into a settlement agreement in which it received $15 million. The $15 million settlement was recorded as a legal settlement in the quarter
ended March 31, 2003.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-19



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##### Table of Contents

INTERPORE INTERNATIONAL, INC.



SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS



Years ended December 31, 2001, 2002 and 2003



|                                           |  |                              |           |                        |   |           |            |  |                          |         |  |   |          
|------------------------------------------ |  | ---------------------------- | --------- | ---------------------- | - | --------- | ---------- |  | ------------------------ | ------- |  | - | ---------
|Description                                |  | Balance atBeginning ofPeriod |           | Additions (Deductions) |   |           | Write-offs |  | Balance at End of Period
|Year ended December 31, 2001:              |  |                              |           |                        |   |           |            |  |                          |         |  |   |          
|Allowance for doubtful accounts receivable |  | $                            | 461,000   |                        | $ | 325,000   |            |  | $                        | 98,000  |  | $ | 688,000  
|Reserve for excess and obsolete inventory  |  |                              | 2,831,000 |                        |   | 1,441,000 |            |  |                          | 296,000 |  |   | 3,976,000
|Year ended December 31, 2002:              |  |                              |           |                        |   |           |            |  |                          |         |  |   |          
|Allowance for doubtful accounts receivable |  | $                            | 688,000   |                        | $ | 156,000   |            |  | $                        | 47,000  |  | $ | 797,000  
|Reserve for excess and obsolete inventory  |  |                              | 3,976,000 |                        |   | 939,000   |            |  |                          | 28,000  |  |   | 4,887,000
|Year ended December 31, 2003:              |  |                              |           |                        |   |           |            |  |                          |         |  |   |          
|Allowance for doubtful accounts receivable |  | $                            | 797,000   |                        | $ | (69,000   | )          |  | $                        | 317,000 |  | $ | 411,000  
|Reserve for excess and obsolete inventory  |  |                              | 4,887,000 |                        |   | 1,942,000 |            |  |                          |        |  |   | 6,829,000





F-20



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##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                        
|3.01          |  | Certificate of Incorporation of Interpore International, Inc. as amended (1)                                                                                                                                                                                                                                                                                                                       
|              | 
|3.02          |  | Bylaws of Registrant (1)                                                                                                                                                                                                                                                                                                                                                                           
|              | 
|3.03          |  | Amendment Number One to Bylaws (16)                                                                                                                                                                                                                                                                                                                                                                
|              | 
|4.01          |  | Rights Agreement dated November 19, 1998, between Interpore International, Inc. and U.S. Stock Transfer Corporation, which includes the form of Certificate of Determination of the Series A
Junior Participating Preferred Stock of Interpore International, Inc. as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (2)
|              | 
|4.02          |  | Registration Rights Agreement dated December 8, 1999 by and between Interpore International, Inc., John A. Dawdy and Andrew G. Hood (19)                                                                                                                                                                                                                                                           
|              | 
|4.03          |  | Form of Common Stock Warrant dated December 8, 1999                                                                                                                                                                                                                                                                                                                                                
|              | 
|10.01         |  | Cancellation and Release Agreement dated March 1, 1993 among Registrant, Interpore Orthopaedics, Inc., Pfizer, Inc. and Howmedica, Inc. (3)                                                                                                                                                                                                                                                        
|              | 
|10.02         |  | Single Tenant Lease dated July 25, 1991 between Registrant and The Irvine Company as amended by a Third Amendment to Lease dated December 11, 1996 (4) as amended by a Fifth Amendment to Lease
dated October 9, 2002 (25)                                                                                                                                                                         
|              | 
|10.03         |  | Business Loan Agreement, Master Revolving Note and Addendum thereto, Security Agreement and Intellectual Property Security Agreement, each dated June 14, 2002, between Comerica
Bank-California and Interpore International, Inc. (23)                                                                                                                                                            
|              | 
|10.04         |  | Amended and Restated Stock Option Plan dated March 19, 1991 (6), First Amendment to the Amended and Restated Stock Option Plan, effective October 15, 1991 (3); Amendment to the Amended and
Restated Stock Option Plan dated September 17, 1994 (7)                                                                                                                                               
|              | 
|10.05         |  | 1995 Stock Option Plan (8)                                                                                                                                                                                                                                                                                                                                                                         
|              | 
|10.06         |  | Stock Option Plan for Non-Employee Directors of Interpore International (9)                                                                                                                                                                                                                                                                                                                        
|              | 
|10.07         |  | Danninger Medical Technology, Inc. Amended and Restated 1984 Non-Statutory Stock Option Plan (10)                                                                                                                                                                                                                                                                                                  
|              | 
|10.08         |  | Danninger Medical Technology, Inc. Amended and Restated 1984 Incentive Stock Option Plan (10)                                                                                                                                                                                                                                                                                                      
|              | 
|10.09         |  | Cross Medical Products Inc. Amended and Restated 1994 Stock Option Plan (10)                                                                                                                                                                                                                                                                                                                       
|              | 
|10.10         |  | Asset Purchase Agreement dated March 12, 1997, among Cross Medical Products, Inc., Danninger Healthcare, Inc. and OrthoLogic Corp. (11)                                                                                                                                                                                                                                                            
|              | 
|10.11         |  | Indenture concerning 8.5% Convertible Subordinated Debentures between Cross Medical Products, Inc. and Fifth Third Bank (12)                                                                                                                                                                                                                                                                       
|              | 
|10.12         |  | Supplemental Indenture between Interpore International, Inc. and Cross Medical Products, Inc. and Fifth Third Bank (5)                                                                                                                                                                                                                                                                             
|              | 
|10.13         |  | Form of Indemnification Agreement (13)                                                                                                                                                                                                                                                                                                                                                             
|              | 
|10.14         |  | Schedule of Parties to Form of Indemnification Agreement (14)                                                                                                                                                                                                                                                                                                                                      
|              | 
|10.15         |  | Agreement between Dr. Edward Funk and Cross Medical Products, Inc. dated February 11, 1998 (15)                                                                                                                                                                                                                                                                                                    
|              | 
|10.16         |  | Form of Employment Agreement dated July 31, 2000 / August 30, 2000 between Interpore International, Inc. and its executive officers (21)                                                                                                                                                                                                                                                           
|              | 
|10.17         |  | Schedule of Parties to Form of Employment Agreement dated July 31, 2000 / August 30, 2000 (21)                                                                                                                                                                                                                                                                                                     
|              | 
|10.18         |  | 1999 Consultants Stock Option Plan (17)                                                                                                                                                                                                                                                                                                                                                            
|              | 
|10.19         |  | Amended and Restated Employee Qualified Stock Purchase Plan dated November 13, 1998 (18)                                                                                                                                                                                                                                                                                                           
|              | 
|10.20         |  | Asset Purchase Agreement dated December 8, 1999, by and among Interpore Orthopaedics, Inc., Quantic Biomedical, Inc., Quantic Biomedical Partners, John A. Dawdy and Andrew G. Hood
(19)                                                                                                                                                                                                           
|              | 
|10.21         |  | 2000 Equity Participation Plan (20)                                                                                                                                                                                                                                                                                                                                                                
|              | 
|10.22         |  | Agreement and Plan of Merger among Interpore International, Inc., OP Sub, Inc., American OsteoMedix Corporation and the shareholders set forth on the signature pages thereto, dated as of May
30, 2001 (22)                                                                                                                                                                                       
|              | 
|10.23         |  | 2003 Equity Participation Plan (24)                                                                                                                                                                                                                                                                                                                                                                
|              | 
|10.24         |  | Form of Non-Plan Non-Qualified Stock Option Agreement                                                                                                                                                                                                                                                                                                                                              
|              | 
|21.01         |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                                                                     
|              | 
|23.01         |  | Consent of Independent Auditors                                                                                                                                                                                                                                                                                                                                                                    



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##### Table of Contents

|              |  |                                                                                                   
|------------- |  | --------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                       
|31.01         |  | Certifications of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002   
|              | 
|31.02         |  | Certifications of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002   
|              | 
|32.01         |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|              | 
|32.02         |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

---

|(1) | Incorporated by reference from our Registration Statement on Form S-4, Registration No. 333-49487.
|--- | --------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference from our Current Report on Form 8-K dated December 1, 1998.
|--- | -------------------------------------------------------------------------------------

|(3) | Incorporated by reference from our Registration Statement on Form S-1, Registration No. 33-69872.
|--- | -------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference from our Current Report on Form 8-K dated February 11, 1998.
|--- | --------------------------------------------------------------------------------------

|(5) | Incorporated by reference from our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998.
|--- | ------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference from our Registration Statement on Form S-8, Registration No. 33-77426.
|--- | -------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference from our Registration Statement on Form S-8, Registration No. 33-86290.
|--- | -------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference from our Proxy Statement for the 1994 Annual Meeting of Shareholders.
|--- | -----------------------------------------------------------------------------------------------

|(9) | Incorporated by reference from our Proxy Statement for the 1995 Annual Meeting of Shareholders.
|--- | -----------------------------------------------------------------------------------------------

|(10) | Incorporated by reference from our Registration Statement on Form S-8, Registration No. 333-53775.
|---- | --------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference from the Cross Medical Products, Inc. Annual Report on Form 10-K for the year ended December 31, 1996.
|---- | --------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference from the Cross Medical Products, Inc. Registration Statement on Form S-2, Registration No. 333-02273.
|---- | -------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated by reference from our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
|---- | -------------------------------------------------------------------------------------------------------------

|(14) | Incorporated by reference from our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998.
|---- | -----------------------------------------------------------------------------------------------------------------

|(15) | Incorporated by reference from the Cross Medical Products, Inc. Annual Report on Form 10-K for the year ended December 31, 1997.
|---- | --------------------------------------------------------------------------------------------------------------------------------

|(16) | Incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
|---- | ----------------------------------------------------------------------------------------------------------

|(17) | Incorporated by reference from our Proxy Statement for the 1999 Annual Meeting of Stockholders.
|---- | -----------------------------------------------------------------------------------------------

|(18) | Incorporated by reference from our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1999.
|---- | -------------------------------------------------------------------------------------------------------------

|(19) | Incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
|---- | ----------------------------------------------------------------------------------------------------------

|(20) | Incorporated by reference from our Proxy Statement for the 2000 Annual Meeting of Stockholders.
|---- | -----------------------------------------------------------------------------------------------

|(21) | Incorporated by reference from our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2000.
|---- | -----------------------------------------------------------------------------------------------------------------

|(22) | Incorporated by reference from our Current Report on Form 8-K filed July 10, 2001
|---- | ---------------------------------------------------------------------------------

|(23) | Incorporated by reference from our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002.
|---- | ------------------------------------------------------------------------------------------------------------

|(24) | Incorporated by reference from our Proxy Statement for the 2003 Annual Meeting of Stockholders.
|---- | -----------------------------------------------------------------------------------------------

|(25) | Incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
|---- | ----------------------------------------------------------------------------------------------------------